Owner Theory of the Firm, Corporate Malfeasance and Economic Predation: Principal and Agent Behavior, Costs, and Governance

Abstract

The global financial crisis of 2008 illustrates the recent notion of a economy (Galbraith, 2006). This begins to answer the question of why near catastrophic corporate malfeasance exists with serious damaging consequences to the global financial system and the real economy. Indeed, they persist despite the well known recognition, theory and application of principal-agent controls and governance. Thus, corporate malfeasance is too big a problem to be dealt with by principal-agent and governance norms. A new theory of the firm, Owner theory offers to explain the nature of corporate malfeasance; it is caused by predatory Owners rather than bad agents. This theory offers a new perspective on the theory of the firm based on the well known agency theory of Jensen and Meckling (1976). As a corporate governance theory, it addresses how a type of capital provider, the predatory Owner gets a return from his investment. Predatory Owners are greedy, cunning and skillful players in a predatory economy. They seek activist and controlling roles in governance to prey upon the wealth of other claim holders'. Such Owners see themselves as being too big and powerful to fail and are emboldened to gamble with and to exploit the firm's wealth for private gain because they are protected by the defining legal features of a corporation (i.e. limited liability, easy transfer of ownership, and agency relationship). They capture the agent manager with non-arms length contracts to help them control the firm and impose severe owner and agent costs and risks to the firm and to society. This is the “Owner Problem or Conflict”. To protect us against economic predation, creating new rules and laws which shed light on large block Owners and hold them liable in corporate malfeasance are recommended. As well, active block holders and founders in the ownership of firms can counteract against predatory Owners.