Editing Shareholder value (section)

== Agency theory and shareholder value ==
{{Main|Agency theory}}
Agency theory is the study of problems characterized by disconnects between two cooperating parties: a principal and an agent.<ref>Kathleen M. Eisenhardt, "Agency Theory: An Assessment and Review", ''The Academy of Management Review'' 14 (1989), 58.</ref> Agency problems arise in situations where there is a division of labor, a physical or temporal disconnect separating the two parties, or when the principal hires an agent for specialized expertise.<ref>{{cite journal | last1 = Shapiro | first1 = Susan P. | year = 2005 | title = Agency Theory | journal = Annual Review of Sociology | volume = 31 | page = 275 | doi = 10.1146/annurev.soc.31.041304.122159 }}</ref> In these circumstances, the principal takes on the agent to delegate responsibility to him.<ref>{{cite journal | last1 = Jensen | first1 = Michael C. | last2 = Meckling | first2 = William H. | year = 1976 | title = Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure | journal = Journal of Financial Economics | volume = 3 | issue = 4| page = 308 | doi = 10.1016/0304-405X(76)90026-X | url = https://bibliotecadigital.fgv.br/ojs/index.php/rae/article/view/36604 }}</ref> Theorists have described the problem as one of "separation and control":<ref>Jensen and Meckling, "Theory of the Firm", 310.</ref>  agents cannot be monitored perfectly by the principal, so they may shirk their responsibilities or act out of sync with the principal's goals.<ref>Eisenhardt, "Agency Theory", 61.</ref> The information gap and the misalignment of goals between the two parties results in agency costs,<ref>Shapiro, "Agency Theory", 265.</ref> which are the sum of the costs to the principal of monitoring, the costs to the agent of bonding with the principal, and the residual loss due to the disconnect between the principal's interests and agent's decisions.<ref>Jensen and Meckling, "Theory of the Firm", 308.</ref>

Lastly, the shareholder value theory seeks to reform the governance of publicly owned firms in order to decrease the principal-agent information gap. The model calls for firms' boards to be independent from their corporate executives, specifically, for the head of the board to be someone other than the CEO and for the board to be independently chosen.<ref>Shapiro, "Agency Theory", 269.</ref> An independent board can best objectively monitor CEO undertakings and risk.<ref>Dobbin and Jung, "The Misapplication of Mr. Michael Jensen", 31.</ref> Shareholder value also argues in favor of increased financial transparency. By making firms' finances available to scrutiny, shareholders become more aware of the agent's behavior and can make informed choices about with whom to invest.<ref>Dobbin, "The Rise of Shareholder Value", ''Sociology'' 25, Harvard University.</ref>