Putting the good back in good corporate governance: The presence and problems of double-layered agency theory

Jonathan D Raelin, Krista Bondy

Research output: Contribution to journalArticlepeer-review

26 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)420-435
Number of pages16
JournalCorporate Governance: An International Review
Volume21
Issue number5
Early online date19 Jul 2013
DOIs
Publication statusPublished - Sep 2013

Keywords

  • corporate governance
  • agency theory
  • managerialism
  • institutional theory
  • responsible governance

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