Earlier this month my co-editor, Mark Chussil, posted a very intriguing (at least to me) essay on this site. He contended that judging performance vis-à-vis the past is not sensible because companies should not assume they can continue to perform as they had in the past. Rather than simplistically compare today to the past, companies should proactively examine their opportunities to do “otherwise.” (See Success Is In a Word.)
Judging performance — and by implication the strategy behind it — against past performance brings another issue front and center. Who is judging?
At the core of this issue is the somewhat convoluted relationship between management and shareholders created by the public corporation. This is the famous “agency problem” identified by the economist Michael Jensen back in the 1970s. Owners (investors) may hire agents (management) to work on their behalf. Agents’ interests, though, may not always coincide with owners’. That doesn’t mean either group is evil; it means only that they are acting in self-interest and their self-interests can diverge, which is why there is an agency problem. …Read More →