Active agents, passive principals: the role of the chief executive in corporate strategy formulation and implementation

Raposo, Clara C.; Dow, James

http://hdl.handle.net/10400.5/24366

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Authors

Raposo, Clara C.

Dow, James

Abstract(s)

In this paper we use agency theory to study the active role of the chief executive in the formulation of corporate strategy. Unlike traditional applications of agency theory, we allow the aggent (CEO) to play a role in defining the parameters of the agency problem. We argue that CEOs willhave oncentive to propose difficult, ambigious strategies for the corporations. The effect arises becuase in equillibium, the agent may be overcompensated in the sense that the participation constraint is not binding in determining his compensation. The agent can exploit this by proposing ambitious corporate strategies, thereby influencing the parameters of the constraints in the agency problem. The principal (the owners of the company) can mitigate this by precommitting to pay high compensation regardless of the manager's chosen strategy, but may optimally perfer not to do so

Keywords

Agency Theory Executive Compensation Free-Cash-Flow Theory Strategic Complexity

URI

http://hdl.handle.net/10400.5/24366

Citation

Raposo, Clara C. and James Dow .(2000). “Active agents, passive principals: the role of the chief executive in corporate strategy formulation and implementation”. London Business School : Said Business School.