EXAMPLE 12.1 DIFFERENCES IN OBJECTIVES IN AGENCY RELATIONSHIPS: ‘Yanoo! AND ENGLISH FRUuTT Differences in in agency relation ships can take many forms, and principals must bbe prepared to think quite broadly about how an agent's objectives might differ from theirs. ‘Two examples help illustrate this point. (On February 1, 2008, the Internet portal firm Yahoo! received a takeover bid from soft- ware giant Microsoft. A corporate takeover ‘occurs when a firm or an individual (Microsoft, in this ease) offers to buy all shares in a “target firm” (such as Yahoo!) and thus take control of the target. Negotiations between the two firms led to a revised bid in May of 2008, with ‘Microsoft CEO Steve Balmer: ‘offer ing $33 per share. Yahoo! CEO Jerry Yang refused, and insisted that the firm was worth at least $37 per share. The firm remained inde- pendent as of May 2012. ‘There are at least three potential explana- tions for Yang’ decision to turn down Micro soft’s offer. First, it could be the case that Yang believed the firm was worth more than Micro- soft’s offer. If, as an independent entity, the firm could generate dividend payments to sharcholders with a net present value of more than $33 per share, then accepting Microsoft's ‘offer would not be in the shareholders’ inter- est. Note, however, that the firm was trading ata mere $19 per share prior to Microsoft's February bid, so stock market participants appeared to think that Yahoo's value as an independent entity was considerably less than ‘Microsoft’ offer. ‘A sccond possibility is that Yang was work- ing hard on the sharcholders’ behalf to try to maximize the purchase price from Microsoft. If Microsoft's maximum willingness to pay for ‘Yahoo! was $40, then Yang could merely be try- ing to drive a hard bargain. If he was eventu- ally able to get Microsoft to increase its offer, then shareholders would benefit. A third possibility, however, is that Yang had different preferences than shareholders regarding ‘Yahoo!® independence. Sharcholders generally might not care whether Yahoo! is an independent entity; instead, they just want to maximize the return on their investment. On the other hand, ‘Yang, who founded Yahoo! in 1994 with fellow Stanford engineering grad student Dave Filo, might value the firm’ continued independence for its own sake. Some simple arithmetic will help draw out the implications of this preference. Suppose Yang, who dirccdy and indirectly owned around 5D million Yahoo! shares as of early 2008, believed that Yahoo! could achieve a stock price ee eae eae ‘Microsoft's $33 offer costs Yang $3 * $150 alin I Yang (shore balding n Vt were worth around a billion dollars) was willing to give up $150 million in order to keep the firm he founded independent, thea his preferences may have differed from those of the firm's share- holders, and an agency problem may have exist. ‘Some sharcholders did seem to be unhappy with ‘Yang; in August of 2008, more than one-third of the firm's sharcholders voted not to reappoint him to the firm's board. ‘A second example of differences in objec- tives in agency relationships comes from a ile neat Oriana Bandiera, Iwan Barankay, and Imran Rasul.‘ Bandiera and colleagues visited a fruit farm in England and worked with manage- ment to try to improve the efficiency of the firm's fruit-picking operation. Field workers at the farm were paid “piece rates"—that is, they received a set rate per piece of fruit (or pound of fruit) they picked. Using statistical analysis, the rescarchers found that worker productivity varied in systematic ways depending on the supervisor to whom the worker was assigned. Worker productivity was highest when the worker and supervisor had a “social connec- tion,” as measured by shared country of origin, shared living quarters, or similar duration of employment at the farm. (Workers at chis farm were hired on seasonal contracts and came from eight nations in eastern Europe.) ‘What can explain this odd pattern? Band- icra and colleagues suggest that supervisors’‘social connections led wo favoritism. That is, ‘supervisors may simply like some workers ‘more than others and may therefore have a preference for helping some workers more than others, so that the favored workers can ‘carn more money through piece rates. Note that this preference likely differs markedly from that of the fruit farm, The principal (the fruit farm) docs not care which of its fruit pick- ‘ers cams the highest pay, while the agent (the supervisor) does. Interestingly, favoritism sscems to have stopped (and overall fruitpicking ‘efficiency rose) afier the firm tied supervisor pay to worker productivity. This suggests that favoritism was not leading supervisors to allo- ‘cate their efforts in the most efficient manner.