Thursday, May 24, 2012

What can President Obama learn from Bain Capital? (ii)

The Economist has a profile of Mitt Romney's business career, arguing that it coincided with three big revolutions in American Business. The second revolution was the idea that a company’s purpose is to make money for shareholders. Up until the 1970's, post-war American capitalism was dominated by managers, who ruled over sprawling conglomerates with elaborate hierarchies, ornate headquarters and three-martini lunches.  Bain Capital helped change this:
But by the time Mr Romney came of age in the 1970s this comfortable world was crumbling. Post-war prosperity had given way to stagflation. The Japanese had started to run rings around slow American giants. And in 1976 a brilliant article by two business academics, Michael Jensen of Harvard and William Meckling of the University of Rochester, offered a radical diagnosis. Corporate America had a principal-agent problem, they said. Agents (ie, managers) were feathering their own nests rather than serving the interests of their principals (shareholders). The solution was to force managers to focus on shareholder value.
Not only is principal-agent conflict between shareholders and managers the topic of Chapter 21, but Jensen and Meckling's analytic framework on how to align the incentives of employees with the goals of the organization is behind the problem-solving methodology of our textbook.

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