Surplus, Agency Theory and the Hobbesian Corporation

The agency perspective has allowed us to understand a remarkable range of phenomena. It is the dominant theory for the study of corporations. The theory, however, in its current state of development, is limited in its explanatory power. It is capable of describing incentive provision, but it is incapable of addressing the allocation of value between the various parties to an enterprise. As presently conceived, the main tenants of agency theory, chiefly being the self-interest of rational, self-maximizing actors, lead one to view the distribution of value as a result of ceaseless negotiation and conflict. This endless conflict is not however consistent with observation, which highlights a difficulty with the theory. In this essay, we will use both the agency analysis and also governance theory, so as to present a fuller, modified, conception of the corporation which resolves this difficulty. The resolution to what would otherwise seem this unending “war of all against all” comes through governance and authority. The achievements of organizational goals require individuals to forfeit their autonomy and accept the stylized roles and duties proscribed to them by a governing party, so that the organization may function coherently. In this extension of agency theory, governance theory acts as an important and necessary complement to the current structured incentives perspective of agency theory, and the corporation, by deciding and fixing the allocation of value. This essay was prepared for the 2013 Spring Business Law Symposium at the Wake Forest University School of Law, in response to the query “Agency Theory: Still Viable?”