Putting the Good Back in Good Corporate Governance: The Presence and Problems of Double‐Layered Agency Theory
16 Pages Posted: 6 Aug 2013
Date Written: September 2013
Manuscript Type. Conceptual.
Research Question/Issue. Given its position as a dominant logic in corporate governance, this paper evaluates the theoretical and practical implications of agency theory on good governance. Agency theory is presented as consisting of two layers, one resting on the assumption of oppositional shareholder–manager interests and the other resting on the assumption of supportive shareholder–society interests. Given the dominance of the simple economic depiction of agency theory, its first layer is heavily researched and supported, while the second layer is largely unsubstantiated and often exploited to obscure inefficiencies in the first layer.
Research Findings/Insights. Agency theory is shown to fill a highly institutionalized position in governance, despite often violating the second layer's assumption of aligned shareholder–society interests. We assert that the relationship between societal benefits and value maximization must be reconceptualized from interdependent to correlated but independent. Otherwise, when the second layer of agency theory is undercut, shareholders can eschew their role as societal guardians to partner with managers and engage in mutual managerialism at the expense of society. We detail how inefficiencies in first layer mechanisms (market regulation, monitoring, and contracts) impact agency theory's second layer and present the new mechanisms of oversight boards and expanded founding firm documents to reintegrate a societal orientation.
Theoretical/Academic Implications. Aligned shareholder–society interests are shown to be frequently undermined, artificially substantiating the second layer assumption that societal betterment can be sufficiently promoted via financial rewards and sanctions. We discuss agency theory's underlying logic and present the possibility that a violated second layer can be exploited to obscure first layer inefficiencies. Ineffectiveness in the first layer's key mechanisms is shown to potentially undercut agency theory's promotion of good corporate governance on an organizational and societal level.
Practitioner/Policy Implications. Oversight boards and expanded founding firm documents are presented to make agency theory's second layer explicit, ensuring the assumed supportive nature of the shareholder–society relationship is substantiated. Specifically, oversight boards formalize how members of boards of directors are vetted, oversee societal claims to ensure that appropriate ones are sufficiently presented and addressed, supervise reporting, and sanction firms who fail to enact these duties. Revised founding documents ensure that both economic and social goals are enshrined in the mission of incorporated firms. Together the two help establish the foundation of a measurable approach to socially responsible actions.
Keywords: Corporate Governance, Agency Theory, Managerialism, Institutional Theory, Responsible Governance
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