The Agency Cost Paradigm: The Good, the Bad, and the Ugly

In the managerialist world that preceded our present world--the shareholder value world--some corporate managers could, and did, help themselves when they should have been doing their jobs. They were bad agents, using their positions to get unwarranted leisure and unwarranted perquisites at the expense of their principals, whether the principals were seen as the corporation, its shareholders, or both. The modern agency cost paradigm has focused the attention of courts, directors, and scholars on this problem, in part by conceptualizing the duty of corporate managers as maximizing shareholder value. 1 This paradigm has had a variety of effects: some good, some bad, and some ugly

Sanitizing Interested Transactions

How should corporate law deal with a controlling person\u27s entry into a transaction with the corporation she controls? How should corporate law deal with transactions or decisions where one or more board members are interested? In this Article, we argue that Delaware law could do a better job answering these questions than it presently does. We propose a modest strengthening of judicial review of interested transactions. For transactions where one or more directors have a conflicting interest and defendants attempt to cleanse the transaction using approval by the disinterested directors, we propose that the defendants show that the approving disinterested directors exercised independent business judgment. Only when the defendants make this showing would the transaction receive the protection of the business judgment rule. For all transactions with a controlling shareholder, the Weinberger entire fairness framework should apply. Since many duty of loyalty cases will be characterized as derivative actions, we would also revise the first prong of Aronson. We propose that if the plaintiff shows that at least one director is interested, demand is excused unless defendants show that the approving disinterested directors exercised independent business judgment and the plaintiffs cannot rebut that showing. If the plaintiffs can show that the transaction was with a controlling shareholder (as defined in the Weinberger line of cases), demand should be excused. Our proposal is far from radical. Rather, it provides weaker oversight of interested transactions than the traditional common law approach, which simply deemed all interested transactions void. It fits well within the purview of current Delaware law, which applies procedural scrutiny when independent directors approve such a transaction. It balances the danger that shareholders will be abused by interested transactions with the danger of encouraging strike suits. Indeed, the fact that Delaware does not already follow a variant of this approach is somewhat surprising

Executive Compensation and the Optimal Penumbra of Delaware Corporate Law

Corporate law has done a very bad job on executive pay: executives have been rewarded for stellar performance that turned out to be anything but stellar, and shareholders have had no meaningful recourse. Indeed, there are many other such cases, where there is no breach of the fiduciary duties of care and loyalty, but the board\u27s behavior nevertheless smacks of a classic agency problem known as structural bias. We argue that law on the books and as enforced is not well situated to deal with structural bias. What shows some promise is the marshaling of extra legal forces that effectively extend Delaware corporate law, constituting a penumbra. Corporate directors\u27 behavior is very much influenced by what is in the penumbra. The penumbra is importantly influenced by the Delaware corporate judiciary\u27s participation in the corporate law debate in fora other than the courtroom. Law firm memos to clients play an important role too, conveying both the court holdings and the dicta as advice to clients. The penumbra also includes the many voices participating in the corporate governance debate through shareholder proposals, court cases brought about shareholder proposals, the views of corporate governance activists involved in the debate. While the penumbra is not an unambiguous good - certainly, actors with problematic self-interests may be among those helping shape it - it provides an important counterweight to the directors\u27 ability to prefer their own interests over those of their principals, the corporation and its shareholders

Executive Compensation and the Optimal Penumbra of Delaware Corporate Law

Corporate law has done a very bad job on executive pay: executives have been rewarded for stellar performance that turned out to be anything but stellar, and shareholders have had no meaningful recourse. Indeed, there are many other such cases, where there is no breach of the fiduciary duties of care and loyalty, but the board\u27s behavior nevertheless smacks of a classic agency problem known as structural bias. We argue that law on the books and as enforced is not well situated to deal with structural bias. What shows some promise is the marshaling of extra legal forces that effectively extend Delaware corporate law, constituting a penumbra. Corporate directors\u27 behavior is very much influenced by what is in the penumbra. The penumbra is importantly influenced by the Delaware corporate judiciary\u27s participation in the corporate law debate in fora other than the courtroom. Law firm memos to clients play an important role too, conveying both the court holdings and the dicta as advice to clients. The penumbra also includes the many voices participating in the corporate governance debate through shareholder proposals, court cases brought about shareholder proposals, the views of corporate governance activists involved in the debate. While the penumbra is not an unambiguous good - certainly, actors with problematic self-interests may be among those helping shape it - it provides an important counterweight to the directors\u27 ability to prefer their own interests over those of their principals, the corporation and its shareholders

The Agency Cost Paradigm: The Good, the Bad, and the Ugly

In the “managerialist” world that preceded our present shareholder value world, some corporate managers could, and did, help themselves when they should have been doing their jobs. The modern agency cost paradigm has focused attention on this problem, in part by conceptualizing the duty of corporate managers as maximizing shareholder value. This paradigm has had a variety of effects: some good, some bad, and some ugly. The agency cost paradigm has had a good effect by focusing on the problem of managerial enrichment and providing a simple, clear benchmark—shareholder value-- that may quickly indicate when managers are performing badly. However, the pathologies of a focus on readily demonstrable—some would say short-term—shareholder value have become clear. Recent examples include transactions in which a principal motivation is a reduction in research and development. Such transactions may not be as unambiguously bad as the bad agents’ behavior in acting for themselves, but may ultimately prove more costly. What about the ugly? Agency costs were supposed to go down if managers focused more on increasing share price. Hence, there was more emphasis on pay for performance (with performance defined as an increase in share price, and share price considered an accurate reflection of performance) than on fixed salaries. But it has proven exceedingly difficult to define performance, and gaming of performance measures is not uncommon. The ugly is how at least some managers have used short-term gimmicks to get short-term stock price gains that increase their own compensation while leaving the corporation and its shareholders no better off. Some scholarship suggests that this effect was actually intended—that what motivated the shift from managerialism to shareholder value was not a (wholly) legitimate attempt to reduce those agency costs, but instead, at least in part, an attempt by institutional investors and other big market players to induce CEOs to game earnings formulas

Bad Agent, Good Citizen?

Analyses of agents’ behavior normally focus on whether an agent is a good agent or a bad agent— whether or not an agent is faithfully pursuing the interests of her principal. But we should also consider whether a lawyer acting as a good agent is also promoting the public interest (i.e., a good citizen) or not (i.e., a bad citizen). Similarly, we should ask whether lawyers acting as bad agents are also harming society, or whether they may actually be promoting the public interest even though they are not promoting their clients’ interests

Astronomical verification of a stabilized frequency reference transfer system for the Square Kilometre Array

In order to meet its cutting-edge scientific objectives, the Square Kilometre Array (SKA) telescope requires high-precision frequency references to be distributed to each of its antennas. The frequency references are distributed via fiber-optic links and must be actively stabilized to compensate for phase-noise imposed on the signals by environmental perturbations on the links. SKA engineering requirements demand that any proposed frequency reference distribution system be proved in "astronomical verification" tests. We present results of the astronomical verification of a stabilized frequency reference transfer system proposed for SKA-mid. The dual-receiver architecture of the Australia Telescope Compact Array was exploited to subtract the phase-noise of the sky signal from the data, allowing the phase-noise of observations performed using a standard frequency reference, as well as the stabilized frequency reference transfer system transmitting over 77 km of fiber-optic cable, to be directly compared. Results are presented for the fractional frequency stability and phase-drift of the stabilized frequency reference transfer system for celestial calibrator observations at 5 GHz and 25 GHz. These observations plus additional laboratory results for the transferred signal stability over a 166 km metropolitan fiber-optic link are used to show that the stabilized transfer system under test exceeds all SKA phase-stability requirements under a broad range of observing conditions. Furthermore, we have shown that alternative reference dissemination systems that use multiple synthesizers to supply reference signals to sub-sections of an array may limit the imaging capability of the telescope.Comment: 12 pages, accepted to The Astronomical Journa

Regulation of endothelial-specific transgene expression by the LacI repressor protein in vivo

Genetically modified mice have played an important part in elucidating gene function in vivo. However, conclusions from transgenic studies may be compromised by complications arising from the site of transgene integration into the genome and, in inducible systems, the non-innocuous nature of inducer molecules. The aim of the present study was to use the vascular system to validate a technique based on the bacterial lac operon system, in which transgene expression can be repressed and de-repressed by an innocuous lactose analogue, IPTG. We have modified an endothelium specific promoter (TIE2) with synthetic LacO sequences and made transgenic mouse lines with this modified promoter driving expression of mutant forms of connexin40 and an independently translated reporter, EGFP. We show that tissue specificity of this modified promoter is retained in the vasculature of transgenic mice in spite of the presence of LacO sequences, and that transgene expression is uniform throughout the endothelium of a range of adult systemic and cerebral arteries and arterioles. Moreover, transgene expression can be consistently down-regulated by crossing the transgenic mice with mice expressing an inhibitor protein LacI(R), and in one transgenic line, transgene expression could be de-repressed rapidly by the innocuous inducer, IPTG. We conclude that the modified bacterial lac operon system can be used successfully to validate transgenic phenotypes through a simple breeding schedule with mice homozygous for the LacI(R) protein.CEH and KIM acknowledge funding support from NH&MRC Project Grant #471421