Beyond Self‐Interest: Agency Theory and the Board in a Satisficing World
| Author | John Hendry |
| Published date | 01 March 2005 |
| DOI | http://doi.org/10.1111/j.1467-8551.2005.00447.x |
| Date | 01 March 2005 |
Beyond Self-Interest: Agency Theory and
the Board in a Satisficing World
John Hendry
Brunel Research in Enterprise, Innovation, Sustainability and Ethics
Brunel Business School, Brunel University, Uxbridge UB8 3PH
Email: john.hendry@brunel.ac.uk
This paper argues that a consideration of some of the peculiarities of boards of directors
can be used as a basis for developing and enriching our theoretical conception of agency
relationships; and that the generalized version of agency theory that results can help us
to better understand some of the empirical observations and theoretical and policy
issues raised by Roberts, McNulty and Stiles.
Roberts, McNulty and Stiles argue that if we are
to understand the governance processes of boards
of directors we need to go beyond agency
conceptions and also beyond the polarities of
agency versus stewardship, and control versus
collaboration. Real board work, they suggest, is
about combining elements of control and colla-
boration in such a way that each enhances the
other, building processes of accountability
though ‘non-executive engagement’, ‘challenging
supportiveness’ and ‘involved independence’. The
effectiveness of the board depends not so much
upon its structural characteristics (composition,
independence etc) as upon how these tensions are
managed by the chairman and non-executive
directors. When either side of the tensions is lost,
whether as a result of individual behaviours,
interpersonal dynamics or externally imposed
prescriptions, boards cease to be effective. I am
in complete agreement with all this, and I also
agree with their call for further in-depth research
into board practices and processes, carried out in
a spirit of theoretical pluralism. In this paper,
however, I should like to argue for a rather more
active interplay of theory and observation than
they suggest. In particular, I shall argue that a
consideration of some of the peculiarities of
boards of directors can be used as a basis for
developing and enriching our theoretical concep-
tion of agency relationships; and that the general-
ized version of agency theory that results can help
us to better understand some of the behaviours
they observe.
Agency theory and the board
Corporate governance research generally, and
research on boards and directors more particu-
larly, has been dominated by agency theory.
Agency theoretic predictions of the links between
board characteristics and performance have not
found strong empirical support, leading some
writers to suggest that the theory needs to be
supplemented by other perspectives, but its basic
validity remains taken for granted (Daily, Dalton
and Cannella, 2003; Hermalin and Weisbach,
2003). Moreover, while there has been plenty of
analysis of specific board variables, the basic
structure and function of the board (within the
Anglo-American context, a unitary board) are
also taken as given. Put these two starting points
together, however, and we immediately run into a
contradiction.
According to agency theory, the central pro-
blem of corporate governance is how share-
holders (as principals) ensure that self-seeking
executives (as agents) act in the shareholders’
interests rather than their own. The principal
legal mechanism for dealing with this problem is
British Journal of Management, Vol. 16, S55–S63 (2005)
DOI: 10.1111/j.1467-8551.2005.00447.x
r2005 British Academy of Management
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