Sustainability and Law and Economics: An Interdisciplinary Redefinition of Agency Theory

Abstract

In this chapter I undertake a critical analysis of mainstream agency theory, which views corporate boards and by extension senior management as ‘agents’ for shareholders as ‘principals’. With failed assumptions and forgotten caveats, this mainstream theory has informed and reinforced the social norm of shareholder primacy, a main barrier to sustainable business. I choose this specific theory as the theme for this chapter, rather than discussing more broadly law and economics, to make a more in-depth point than a broader canvassing of various approaches and criticisms of law and economics could do. I use Kraakman et al.’s The Anatomy of Corporate Law as the starting point, because their express claim that there is a single universal ‘anatomy’ has with its comparative framing more than any other law and economics theory influenced the discourse in corporate law and corporate governance over the last decades. This chapter challenges the assumptions on which this mainstream use of agency theory is based and presents a tentatively drafted redefinition of agency theory with the aim of contributing to a theory that can form the basis for sustainable business.

Keywords: Company law, corporate boards, principal-agent issues, planetary boundaries, social foundations