Monday, March 23, 2009

The Financial Crisis and a Flaw in Corporate Capitalism - Brookings Institution

For practical reasons, day-to-day control over publicly traded corporations is placed in the hands of company managers rather than the shareholders who own the company. Managers have wide latitude on how to organize production, allocate investment funds, and select and market the products the company sells. Writing in late 18th century, Adam Smith pointed out the weakness of this arrangement: “… being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery [partnership] frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” A crucial problem is that the interests of the company’s managers are not the same as those of people who own the firm.
The Financial Crisis and a Flaw in Corporate Capitalism - Brookings Institution

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