Flujo de Gestión de recursos humanos

Agency theory has been one of the most important theoretical paradigms in economics during the last twenty years. It has developed independently of the property rights literature even though the problems with which it is concerned are similar; the approaches are in fact highly complementary to each other.

The standard definition of corporate governance among economists and legal scholars refers to the defence of shareholders’ interests (Tirole 2001). The issue of corporate

governance arises when one departs from the owner-managed firm and introduces the

concept of a separation between ownership and control. Financial economists have long

been concerned with the incentive problems that arise when decision making in a firm is the province of managers who are not the firm’s security holders. The modern literature on the problem of the separation of ownership and control dates back at least to Berle and Means (1932). They predict that the increasing professionalisation of managers would lead to firms being run for their benefit rather than that of the owners. In 1976, Jensen and Meckling formalised this problem by proposing a “principal-agent” framework to model the conflict of interest between the principal (in this case the owner) and the agent (in this case the manager).

Typically, in the agency literature, there is a risk-neutral principal who supplies capital and an agent - averse to risk and labour - who supplies labour (Jensen and Meckling 1976). The conflicting interests between the agent and the principal arise mainly from three sources. These are: a) choice o f effort: additional effort by the agent generally increases the value of the organisation, but to the agent effort is “bad” (Ross 1973); b) differential time horizons: the agent’s claim on the organisation is generally limited to

his tenure with the organisation whereas the latter has indefinite life and the principal’s claims are tradable claims on the entire future stream o f cash flows (Jensen and Meckling 1976); and c) differential risk exposure: the agent typically has a nontrivial fraction of his wealth in firm-specific human capital and thus is concerned about the variability of the total firm value (Reagan and Stulz 1983).

The above conflicting interests in turn generate the classic agency problem (Jensen and Meckling 1976; Tirole 1988; Hart 1995) characterised by imperfect and asymmetric information. In particular, an informational advantage lies with the agent, such that contractual arrangements (including compensation incentives) based on the agent’s level of effort are not possible. Consequently, an outcome-based contract (e.g. based on profit) is alternatively used. In this case, contracts although based on observable profits rather than effort, are complete in the sense that they specify the parties’ obligations in possible future states of the world contingent on these obligations being observable and verifiable. This means that there will never be any need to revise or renegotiate the initial contract, because any addition or change to it could have been anticipated and specified in the initial contract (Molin 1996). As Hart (1995, p.679) remarks “in a comprehensive contracting world, everything has been specified in advance, i.e. there are no ‘residual’ decisions”. Governance structure in such a world is deemed irrelevant.

A fundamental presumption of the above is that contracting is perfect and costless. Transaction costs in writing contracts, however, may be considerable and numerous. According to the transaction costs literature there are three main types o f such costs: a) the cost of specifying all eventualities and their resolution during the lifetime o f the contract, b) the costs of negotiating with all the contract parties about the plans, and c)

the costs of formally writing down the contract such that they can be enforced by a third party in the event of a dispute arising (Williamson 1975). Under the above circumstances the parties will no longer be able to compose a comprehensive contract.

The reason why this incompleteness matters is that it imposes costs. Renegotiations may be costly, time-consuming and wasteful with resources, while serving no overall productive purpose. Moreover, incomplete contracts may lead to costly legal disputes or even present an obstacle to reaching efficient agreements. Consequently, as Hart (1995) emphasises, corporate governance does matter under the following two circumstances: a) an agency problem between members of the organisation (e.g. shareholders and

managers) must exist and b) transaction costs must be prohibitive, such that the agency

problem cannot be resolved with a well-defined contract. The principal-agent considerations alone may be necessary but are not sufficient to provide a role for governance structure (Hart 1995, p.679).

So, incomplete contracts, in conjunction with the agency problem of interest- misalignment and incomplete/asymmetric information, provide a role for governance structures that can be seen as a mechanism for making decisions that have not been specified in the initial contract. More specifically, governance structures allocate - in the words of Grossman and Hart (1986) and Hart and Moore (1990) - “the residual rights of control” over the company’s assets, i.e. the right to control all aspects of the assets that have not been explicitly given away by contract. This property rights approach

advocated by Grossman, Hart, and Moore singles out a specific governance structure,

namely, ownership. That is, the purchase of the residual control rights'.

Nevertheless, as Tirole (2001) points out allocation of the control rights (i.e. the purchase of the right to affect the course of action once the firm has got started) cannot be the full story. In his most recent paper on corporate governance, Tirole (2001) makes the valuable distinction between “formal control” and “real control”. According to his remarks, although shareholders have formal control over a number o f decisions (through

their votes), managers often have real control. That is, managers have “private

information" that often enables them to serve their own goals, such as carry out

unprofitable but power-enhancing investments1 2. In view of the managers’ ability to

pursue their own agenda, it is obviously important that there exist checks and balances on managerial behaviour. Given that monitoring is costly, dispersed shareholders, however, have little or no incentive to monitor management; instead they free ride on the hope that other shareholders will do the monitoring. And since all of them behave the same way the end result is that no monitoring takes place (Hart 1995). This creates the need for corporate governance.

Much of the subject of corporate governance deals with the constraints that investors

put on managers in order to curb their opportunistic incentives or, in other words, their

self-serving behaviour. Thus corporate governance institutions, such as the board of

directors, can play a key role in monitoring top executives (Fama and Jensen 1983), and

1 The focus o f the current thesis is the importance of control rights in corporate governance. An extension of this literature addresses the importance of control rights in corporate finance. For more details see Aghion-Bolton (1992), Hart and Moore (1998).

This is not to say, however, that managers’ real control is unlimited or that they have formal control (i.e. that they end up making the decisions). In practice, management needs to refer to shareholders for permission concerning many of their decisions.

indeed in curbing it, by seeking to replace part or all of the management who fail to perform at the best interest o f shareholders (Weisbach 1988). It is this relationship that becomes the central focus o f Chapter 4 and also has relevance to the work presented in Chapter 5.

The rest of the current chapter deals with prior empirical work, starting with that of Chapter 4.