His pioneering research on organizational theory, started at Rochester, has left an enduring mark on the academic and business worlds.
It糖心传媒檚 hard to overstate the effect economist , the former LaClare Professor of Finance and Business Administration at the , has had on his field and beyond. His pioneering research not only revolutionized the understanding of corporate finance and organizational theory, but also changed the way companies are run.
Jensen, who taught at the University糖心传媒檚 for two decades from 1967 to 1988, died this month. He was 84.
During his tenure at Rochester, Jensen cofounded one of the most prominent peer-reviewed academic journals, the . He also established the University糖心传媒檚 Managerial Economics Research Center in 1977, serving as its director before leaving for Harvard University in 1988, where he was eventually named a professor emeritus.
In the world of academia, a high number of citations糖心传媒攚hen other academics cite your research糖心传媒攊s a quantifiable measure of success. Having an invention or idea named after you, and seeing it widely used, is another. Jensen had both.
His total body of work, spanning a handful of books and more than 100 academic papers, racked up more than (as of April 2024), making him one of the most influential financial economists of all time. In the late 1960s, he developed what came to be known as , a method for calculating the performance of mutual fund managers.
Jensen had fans and detractors. In , a columnist for Bloomberg Opinion,听his critics deemed him 糖心传媒渢he high priest of the greed-is-good era who justified exorbitant executive pay and vulture capitalism,糖心传媒� while his admirers saw 糖心传媒渢he surgeon who gave Anglo-Saxon capitalism a new lease of life by slicing off the fat, removing the malignant tumors and prescribing a strict exercise regime.糖心传媒�
Shooting to economic stardom with the 糖心传媒渢heory of the firm糖心传媒�
In 1976, Jensen published a seminal paper coauthored with the late , then-dean of the Simon School. Neither could have foreseen that the publication, titled 糖心传媒�,糖心传媒� would become the single in business academia.
In the paper, Jensen and Meckling describe a model in which the owners of a company (the 糖心传媒減rincipals糖心传媒�) hire executives (the 糖心传媒渁gents糖心传媒�) to steer the company on their behalf. They argued that conflict, especially over costs, was baked into the system, unless the incentives were such that the agents wouldn糖心传媒檛 try to take advantage of the principals.
Their solution? Make top executives hold an equity stake in the company they helm so that they, too, had a vested interest in the corporation糖心传媒檚 financial success, trimming away managerial excesses糖心传媒攁nd sometimes parts of the workforce.
Or as Wooldridge noted plainly: 糖心传媒淭he more you turn 糖心传媒榓gents糖心传媒� into 糖心传媒榩rincipals,糖心传媒� the more you will give them an incentive to squeeze the maximum value out of the companies that they were hired to run.糖心传媒�
Jensen and Meckling posited that as the top managers糖心传媒� ownership stakes increased, their interests became more aligned with the interests of the shareholders. It was this central argument, developed further with Jensen糖心传媒檚 long-time colleague and collaborator , that laid聽the聽foundation聽for the widespread use聽of聽stock聽options聽as executive compensation聽tools (which has since become a standard component of top managers糖心传媒� pay packages).
糖心传媒淗is old classmates at Chicago just thought he was nuts,糖心传媒� says Murphy, now a professor of finance and business economics at the University of Southern California糖心传媒檚 Marshall School of Business, about the business school where Jensen received an MBA and a PhD. 糖心传媒淭he Chicago way of thinking was that the market should solve everything, and that we糖心传媒檒l get to efficiency, as long as the markets are working well. But Mike and Bill disagreed.糖心传媒�
Nearly fifty years later, the paper remains 糖心传媒渇undamental to understanding the dynamics of modern corporations,糖心传媒� notes , Simon糖心传媒檚 current dean and a professor of business and economics. 糖心传媒淢ike will be remembered not only for his intellectual brilliance but also for his unwavering commitment to advancing knowledge that transformed the way we perceive and practice economics and finance.糖心传媒�
Described by those who knew him as 糖心传媒渁 force of nature糖心传媒� who brought an 糖心传媒渁mazing energy糖心传媒� to whatever he undertook, Jensen slept little and rose early. Starting his workday at 4 or 5 a.m., he was known to take short afternoon power naps in his office.
Work was his passion. So were the outdoors. Another one was collecting fine wine.
The proud owner of two large wine cellars in Vermont, one in his main house and another in the guest house, Jensen also had several large wine cabinets installed at his Florida residence. According to friends, even while sipping exquisite wines, his notion of good conversation invariably returned to ideas and economics.
A 40-year collaboration, originating at Rochester
Murphy糖心传媒檚 and Jensen糖心传媒檚 four decades-long professional collaboration started at Rochester, when Murphy糖心传媒攁 young assistant professor on his first job糖心传媒攃owrote an op-ed for the New York Times with Jensen, who by then was already the Simon School糖心传媒檚 undisputed superstar.
Other coauthored papers followed, including 糖心传媒溙切拇綕 in 1990.聽糖心传媒淲e felt that following the stock price was the right thing to do,糖心传媒� says Murphy, explaining their underlying idea that managers needed to be paid, at least partially, in equity or stock options to maximize shareholder聽value.
But there was a flipside when CEO pay reached stratospheric heights. Jensen and Murphy had advocated for an increase in stock options for the top brass in return for a reduction in other types of compensation. 糖心传媒淲hat actually happened, to our chagrin, was that companies would layer stock options on top of existing competitive pay packages.糖心传媒�
Frequently fellow academics, labor unions, or the public at large disagreed with Jensen, who considered takeovers (and hostile takeovers) a fundamentally efficient way to unleash value. He also saw the positives of golden-parachute arrangements that would effectively bribe executives not to resist such takeovers.
At one point, Murphy and Jensen embarked on a hot-button book project with Eric Wruck, who earned an MBA at Rochester, titled CEO Pay and What to Do About It. Due to be published by Harvard Business School Press, the work-in-progress attracted early media interest in 2007, including from the .
奥谤耻肠办糖心传媒檚 stalled progress on the project, although Jensen and Murphy continued to work on it until 2018. Ultimately, the book failed to come to pass, its chapters appearing instead as a series of academic articles.
In what would have been the last chapter, they warned Congress, in so many words, to butt out: 糖心传媒� is that the best way the government can fix executive compensation is to stop trying to fix it, and by undoing the damage already caused through existing regulations that have, in aggregate, imposed enormous costs on organizations, their shareholders, and social welfare.糖心传媒�
Putting integrity back into finance
Later in life, Jensen added another dimension to his research糖心传媒攖he idea of integrity through the lens of corporate accountability.
In the wake of the infamous corporate fraud cases and subsequent implosions of Enron and WorldCom in the early 2000s, followed by the global financial crisis of 2008, Jensen began advocating for a change in corporate behavior. In 2012, together with Werner Erhard, he that integrity was 糖心传媒渁s important as labor, capital, and technology. Without a clear, concise, and most importantly, an actionable definition of integrity, economics is far less powerful than it can be.糖心传媒� The same, the duo wrote, applied to finance and management.
Aware that this position could be perceived as a departure from Jensen糖心传媒檚 earlier research, the coauthors cautioned readers that because their intention was to 糖心传媒渃all attention to aspects of life and aspects of finance that are not commonly discussed, or certainly not discussed in the way we will do so here, you are likely to find it strange and even wrong.糖心传媒�
An enduring legacy, including as a colleague, mentor, and teacher
Jensen糖心传媒檚 influence on the academic and business worlds is undisputed.
Several faculty members at Simon, including ,听,听,听,听, and聽, were close colleagues of Jensen糖心传媒檚. All of them have become influential in their own right, carrying forward his legacy of groundbreaking research and innovative thinking.
Jensen also left a lasting impression as an educator. Throughout his career, Jensen糖心传媒檚 teaching and mentorship inspired countless students and colleagues, many of whom went on to build their own successful careers in academia.
One of them is , now a professor of finance at Ohio State University糖心传媒檚 Fisher College of Business (and Eric 奥谤耻肠办糖心传媒檚 widow). Wruck, who received a PhD at Rochester and initially had followed Jensen to Harvard, describes him as 糖心传媒渢he most intellectually curious and creative person糖心传媒� she has ever worked with. She credits Jensen with teaching her how to 糖心传媒渢hink critically without being closed-minded, and to never give up.糖心传媒�
Wruck adds, 糖心传媒淣ot a day goes by that I do not use some idea, concept, or way of thinking that I learned from him.糖心传媒�
