The Perils of Agency Theory for Board Decision-Making
When corporate boards steer their organizations wrong, it’s natural to ask what part of the board decision-making process failed to get the business to the right conclusion. According to the Harvard Business Review, the problem may reside with the “agency theory,” in which shareholder value becomes the key guiding principle of company leadership. (Apr. 7, Bower and Paine)
The authors pointed out that even though agency theory has become normalized and accepted since its 1970s rise, several elements of this approach can cause questionable decisions. For instance, there is often a gulf between public shareholders and the targets of their investments. This means their decisions don’t necessarily keep the effects of their choices in mind.
Bower and Paine added that the agency model also relies on a legal relationship that doesn’t actually exist: Under Delaware corporate law, shareholders do not have the “dominion” that would give them ownership power. Furthermore, the fact that shares are commonly sold quickly by speculators means shareholders have little incentive to think about companies’ long-term prospects.
Shareholders also tend to be free from most of the accountability that applies to directors and other officials. This combination of ownership voting rights and a lack of matching responsibilities can put companies in compromised positions. Moral quandaries can also trickle down to the rest of the business when stock-increasing activities become a main objective and favored over long-term programs such as research and team building.
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