Tuesday, February 3, 2004

Rebalancing Power Proximity and Interest

Cross-posted from System Viability and Corporate Governance blog

Agency theory says that the agent (e.g, the management) has many opportunities to behave in ways that are against the interests of the principal (e.g the shareholder). This can be explained by an uneven distribution of power (the agent has too much) and proximity (the principal has too little).

Technology potentially provides greater proximity for those with a legitimate interest. It brings stakeholders closer to what is going on. This proximity may be measured in terms of data accuracy, granularity (finer detail) and currency (more up-to-date).

Some commentators believe that companies should release financial information to investors more frequently. (For example, monthly reporting rather than quarterly). Continuous information reduces surprise, reduces risk, therefore increases the investment return for the investor and reduces the cost of capital for the company. Ultimately, such published figures are driven by the company’s internal data, and could in principle be released in near real-time, subject to appropriate (automated) policies for filtering and delay.

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