Naive shareholders taken for a ride?

A few recent corporate governance transactions are worrying. Is this evidence of a new variant of the old principal/agent conflict? This conflict occurs when the CEO (agent) and the owners (principal) of the company have different interests? Here are two recent examples:

• Dell. Michael Dell CEO of Dell drives the share price of Dell down by poor management. Then he makes a bid for the whole company together with a private equity consortium. Michael Dell will remain as CEO and now he will be able to turn around the company that he was not able to turn around in the preceding years. Comment: If Mr Dell will be so good at fixing Dell, why couldn't he fix the company when he was CEO? His claim that the stock market would not allow him to take the necessary actions is just not credible
• Nokia. Stephen Elop CEO of Nokia and a former high level executive at Microsoft stops development of Nokia's Symbian operating system and focuses on the Windows Phone. Before Nokia has staged a turnaround, he negotiates a sale of Nokia's mobile phone division to Microsoft. Microsoft gets the mobile phone division cheaply and Elop moves back to Microsoft. Comment: Nokia and Microsoft are in the same boat and both need the Windows smartphone to be a success. Why would Mr Elop sell the mobile phone business to Microsoft before the Nokia turnaround is complete? It is true that Nokia is dependent on Microsoft, but the reverse is equally true. Why is it good for Nokia's shareholders that Mr Elop completes the turnaround after being hired by Microsoft?

The principal/agent conflict used to be seen as one where the interests were not perfectly aligned. This could result in the agent rewarding himself with a bit higher salary, focus on charity projects, or maybe hiring relatives. In contrast, this new type is really the principal/agent conflict on steroids.

I find it hard to put the finger on the real, underlying issue. It is not that the offers to buy Dell and Nokia are bad at this point in time. Clearly the respective offer includes a generous premium to the extant share price. The problem is somehow that management ran the business into the ground without any objection from the shareholders. And then management then gets a second chance to turnaround the company.

Shareholders will have to exercise more caution when the CEO has conflicts of interests of the above kind. Such caution is unlikely to happen in large companies with a very diffused ownership. Shareholders are probably best off voting with their feet and sell their shares if they suspect this type of conflict of interest.