Contracting with a quiet-life manager

Abstract

The aim of this paper is to analyse how employees may affect firm’s corporate governance. We analyse shareholder–manager relationship through a principal-agent framework. The manager is the agent in charge of taking decisions for firm’s success. Yet, when deciding, the manager takes into account employees’ preferences, i.e., the manager wants to enjoy a ‘quiet life’. We build a theoretical (mathematical) model based on principal-agent models in which the manager (the agent) interacts with the shareholder (principal) but it is influenced by employee’s decisions. Our results highlight that having a quiet-life manager is not necessarily linked to a destruction of value, as suggested in recent research. It might even recover part of the efficient decisions (at a cost borne by the shareholder). This research links the management of human resources with corporate governance enlarging the concept of corporate governance itself. It may help to differentiate better situations where labour is highly protected from those that are not as protected, which in turn has implications on the level of manager’s discretion.