Seminar – Principal costs: Re-examining the relationships among principals, agents and firms

Professor Maria L. Goranova, Professor in Organizations & Strategic Management, Ronald E. Pawasarat Faculty Scholar, Lubar School of Business, University of Wisconsin – Milwaukee

From its inception in the mid-1970s, agency theory has drawn attention to “the principal’s problem,” i.e., the incentive and informational concerns arising from a principal’s delegating responsibility to a self-interested agent. However, we contend that the common transplanting of this dyadic principal-agent problem into the corporate context has blurred the important distinction between principals and the firm and thus neglected likely concerns in that relationship. To redress this imbalance, we advance a framework for analysis that specifies principal costs vis-à-vis the firm in two contrasting corporate contexts: (1) the wholly owned firm managed by the owner (in the context of no agency costs and no principal-principal expropriation, we identify principal costs vis-à-vis the firm in terms of principal’s consumption and competency); and (2) the dispersed ownership firm with no controlling principal (here, we identify principal costs vis-à-vis the firm in terms of principals actively seeking to impose costs on the firm via moral hazard and disproportionate influence, and the inability of passive shareholders to prevent that due to morale hazard and information asymmetry). We conclude by considering how our reconceptualisation of “the firm’s problem” to include minimising principal costs can meaningfully influence future corporate governance research.

Speaker bio

Maria Goranova is Professor of Organizations and Strategic Management at the Lubar College of Business, University of Wisconsin – Milwaukee. Her research examines corporate governance, ownership, and shareholder activism issues in the context of strategic management, and has been published in Strategic Management Journal, Journal of Management Studies, Organization Science, Journal of Management, and others. She was guest editor for 2022 special issue in Corporate Governance: An International Review (CGIR): “Ownership and Corporate Governance across Institutional Contexts,” and co-editor of Shareholder Empowerment: A New Era in Corporate Governance. Maria serves on the editorial board of Journal of Management, as an editor of CGIR, and was previously associate editor for Business & Society. She serves as Director for the M&I Center for Business Ethics and teaches strategic management and corporate governance courses at the undergraduate, graduate, and doctoral level. She received a PhD in business administration from Syracuse University.