Principles vs. Principal: Reconciling norm compliance and shareholder value

This paper considers situations where an agent (say, a polluting firm's CEO) must allocate his nonobservable effort across two distinct tasks (say, revenue/market share enhancement and environmental stewardship), and where two principals (say, the firm's shareholders and an external stakeholder) hold diverging viewpoints on what the best allocation should be. Both characteristics of this context—multitasking and conflicting principals—are normally seen as obstacles to strengthening the agent's incentives. This paper proposes a simple arrangement, based on contingent monitoring and clawbacks, that can overcome these obstacles. Under this arrangement, the principals would end up coordinating their respective incentive schemes so that the agent considers his two tasks as complementary utility-increasing activities. Applications to regulatory compliance, corporate social responsibility, and innovation management are briefly sketched.