Steak Dinners Sell ETFs

One of the main problems in finance is the principal-agent problem, and one of the main forms that it takes is steak dinners. You are selling a product, and you want someone to buy it. The person making the buying decision is not necessarily the person paying for the product, or the person who will benefit if it’s good or suffer if it’s bad. If you are an investment banker, you are selling financial services to a corporation, but the corporation’s decisions are made by a person — perhaps the chief executive officer, perhaps the assistant treasurer — and she likes steak. If you take her out to a nice dinner, maybe she will buy your financial services, even if your competitors offer better services at a lower price. She has a fiduciary duty to her company to get the best deal for shareholders, but she really likes steak. The value of the services, and their cost, accrue to the corporation and its shareholders; the steak accrues to the assistant treasurer.

I say “steak dinners” because steak dinners — and tickets to sporting events, and fancy conferences in nice locations — are the standard currency for this sort of thing, because the more obvious currency — money — is off limits. If you went to the assistant treasurer of a company and said “your company should pay my bank $10 million to do stock buybacks, and in exchange I’ll hand you this briefcase with $1 million in it,” that would be bad. That would be a bribe, and you and she would get in trouble for it. That is a very clear violation of her duty to her company. The steak dinners are not. “I met with investment bankers to discuss value-added strategies for doing stock buybacks,” she can say, “and the meeting happened to occur at a convenient time (dinner) and place (steakhouse).” Nothing untoward about that. She was a good fiduciary for her company; she was just trying to get information and do due diligence and learn things; her loyalty to shareholders could not be overcome by a mere steak dinner. Even if the wine was also nice.