Michael C. Jensen, 84, Who Helped Reshape Modern
Capitalism, Dies
He heralded stock options and golden parachutes as a
professor at Harvard Business School, influencing a generation of Wall Street
executives.
Michael C. Jensen Tribute
A Famed Economist’s Public Company U-Turn
Jensen had something of a penchant for intellectual
pivots. Whereas Jensen and Meckling maintained in the mid-1970s that it was
“reasonable to argue that all markets are always in equilibrium,” Jensen argued
in his 1993 presidential address that “the product and factor markets are slow
to act as a control force” and kicked into operation “too late” to preclude a
substantial “waste of resources.” Likewise, with respect to the efficacy of
share prices, he went from saying in 1984 that “a security’s market price
represents the best available estimate of its true value” to a 2002
condemnation of a “dysfunctional conversation between Wall Street” and public
company executives focusing on corporate earnings which resulted in “overvalued
stock.”
Advocate of Paying Chiefs Well Revises Thinking
Transaction Man
In 1976, two members of the faculty at the University
of Rochester’s business school, Michael Jensen and William Meckling, published
an article in the obscure Journal of Financial Economics called “Theory of the
Firm: Managerial Behavior, Agency Costs and Ownership Structure.” It provided
the intellectual foundation for bringing together one set of ideas about how to
change the ownership structure of a company with another set of ideas about how
to change the way it operated…
Jensen and Meckling argued that publicly held
corporations were poorly managed, because their chief executives, with their
generous salaries and high job security, had no real incentive to “maximize the
value of the firm.” If a company could be restructured so that it was run by
the owner, and if it could take on a lot of new debt that it had to pay down
with cash, then it would maximize its value, rather than the comfort and
prestige of its C.E.O.