The principle-agent model in the real world arises when
conflicts of interest take place between a principal and an agent. I have not
been put into a situation in my life however; there are plenty of examples that
can be looked within the public sector. One example of this model is the
current dispute between the Barclays Bank and its shareholders.
I am a fairly big soccer fan and enjoy watching English
Premier League soccer. My favorite premier league team is Manchester United
whose net worth is approximately $420 million. The Manchester United football club
is owned by Barclays Bank. Naturally, I have been monitoring this story on the
off chance that it will affect the team. Currently, the bank is facing much criticism
from its shareholders for its excessive bonuses payments to its employees. Over
a year ago the board voted for proposals to pay approximately 2.4 billion euros
in bonuses for its employees. The shareholders feel that this is an extremely
unnecessary and is an improper use of money, especially since much of the
proposal is funded by them. Most feel they deserve higher dividends and/or that
it should be invested into the Manchester United Football Club.
Barclays is faced with a difficult situation because the
proposal is best for their own growth. Without the bonuses a large number of
top executives threatened to part ways with the company. These being top
executives, they could not afford to lose arguably the most important employees
within their organization. As a result, the proposal was voted for in order to
make sure they retain profits and continue to grow as a firm.
When two principles don’t see eye to eye, it is best to look
at the opposing viewpoints and try to come up with a solution to the problem in
which both sides come to a compromise. In this case, Barclays should have expressed
the need for the bonuses, relaying that without them it could have impacted the
net worth of the shareholders stake in the bank. In addition, Barclays could
have agreed to lower the amount to money the proposal included. However, this
is much more complex then it seems because there are so many players with
different beliefs and viewpoints. Never the less, proper communication needs to
be achieved to resolve tensions between parties and reached a reasonable solution
to the problem. The Barclays Bank failed by satisfying the decision that was in
their best interest while ignoring the shareholders. This may turn out to be an
inefficient decision, leading to a decrease in the amount of shareholders over
the next year.
This is an interesting triangle, a specific example of the more general issue with management as the agent and both shareholders and employees as the two principals. This PBS story from last summer shows these sorts of conflicts are not just restricted to the finance industry.
ReplyDeleteI don't know the specifics about the Barclay's situation, but in general since 2008 I believe Boards of Financial Houses have been more skeptical about both investment practice and compensation policy.
After the next midterm we will have a brief go at something called Efficiency Wages - where employees are paid more than is necessary to retain them, but as a way to keep them productive. The practice may be sensible. But if shareholders don't understand it, they will feel they are being ripped off. This doesn't have an easy immediate resolution. The magnitudes regarding compensation are different between the Barclay's case and the supermarket case, but the underlying economics is quite similar.
The PBS story on Market Basket is an extremely interesting example of the principle agent model. It appears that Arthur T. has a fairly large following who are upset with his dismissal as CEO. Based on the video footage it appears that Market Basket better begin to negotiate with its employees before its revenue and reputation takes too large of a hit.
ReplyDelete