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MD
54,1
Agency theory: the times,
they are a-changin
Josh Bendickson
174 Department of Management, College of Business,
East Carolina University, Greenville, North Carolina, USA
Received 12 February 2015 Jeff Muldoon
Revised 14 June 2015 School of Business, Emporia State University,
16 October 2015
Accepted 23 October 2015 Emporia, Kansas, USA
Eric Liguori
Department of Management, The University of Tampa,
Tampa, Florida, USA, and
Phillip E. Davis
Department of Management, College of Business,
East Carolina University, Greenville, North Carolina, USA

Abstract
Purpose Theories develop over time and are influenced by both events and people. Looking
primarily at the applications between contracting principal-agent relationships, the purpose of this
paper is to explore how agency theory emerged from a number of economic and social developments.
In doing so, the authors explain how this once dominant theory comes up short regarding varying
realms of entrepreneurship as well as with multiple modern business phenomena.
Design/methodology/approach The authors first present a brief overview of agency theory.
Second, the authors identify major events and people and address how they impacted the development
of agency theory. Third, the authors provide insights on agency theory across three contexts (strategic
entrepreneurship, social entrepreneurship, and family business). Implications, limitations, and future
research directions are then offered.
Findings The authors provide a deeper understanding of agency theory, thus broadening its
underpinnings and enabling readers to more readily understand why agency theory is limited in its
explanation of certain and modern business phenomena. The authors find that some of the seminal
influences to agency theory are quite dated which has limited its explanatory power in terms of the
modern day business and with more recent disciplines such as entrepreneurship.
Research limitations/implications The authors are limited by their choices of major events
that influenced agency theory at the expense of not being able to include everything that may have
impacted the theory over time. These limitations, however, are offset by the research implications.
As the authors highlight the underpinning of agency theory, the authors subsequently provide scholars
and practitioners with five primary boundary conditions, each of which are in need of attention for
agency theory to maintain relevant explanatory power.
Originality/value A deeper understanding of agency theory can be gained by looking at its
underpinnings. By presenting numerous principal-agent conflicts and demonstrating areas in which it
has fallen short (i.e. entrepreneurship and more recent business phenomenon), we shed light on the
obstacles agency theory must overcome in order to maintain its position as a prominent theory.
Keywords Family firms, Entrepreneurship, Agencies
Paper type Conceptual paper

Management Decision
Vol. 54 No. 1, 2016
pp. 174-193
Emerald Group Publishing Limited
0025-1747
The authors acknowledge the helpful feedback and guidance of Arthur Bedeian and Jean
DOI 10.1108/MD-02-2015-0058 McGuire on earlier versions of this paper.
Introduction Agency
Agency theory is not a new concept, rather an incremental advancement encompassing a theory
variety of relationships and ideas. Mahoney (2005) stated that the corpus of agency theory
consists of a cluster of seminal articles that scholars typically seek out for information
about the theory (i.e. Arrow, 1985; Berle and Means, 1932; Jensen and Meckling, 1976;
Levinthal, 1988; Pratt and Zeckhauser, 1985). In this paper we explore the fundamental
underpinnings based on contributions from influential people, seminal research articles, 175
and the modern business environment as they relate to the evolution of agency theory.
This approach informs the past, current, and future applications of the theory. We narrate
relevant shifts in workplace dynamics, and although this is not intended to be exhaustive,
these events offer a foundation to examine a common theme: the need for governing
mechanisms and changes in modern business, including entrepreneurship. Although we
are certainly not the first to critique agency theory (e.g. Dobbin and Jung, 2010), we are
confident that management scholars, agency theorists, entrepreneurship scholars, and
practicing managers will find value in our overview, and at times, our critique as we point
out five boundary conditions agency theorists need to address.
We are primarily interested in two fundamental questions. First, what are the
underpinnings of agency theory (i.e. events and people that led to its development)? Few
would argue greater theoretical development is not needed in management (Pfeffer, 1993),
and agency theory is one of the dominant theories in strategy and especially in corporate
governance. Yet, despite the development and acceptance of agency theory in the
strategy literature, scholars have neglected to consider the core underpinnings of the
theory and why and where those underpinnings may now lead the theory to come up
short in terms of current usefulness. Therefore, second we ask, what are the boundary
conditions and implications of agency theory due to the aforementioned underpinnings
that are misaligned with issues in todays business environment?
Answers to the first question will provide a deeper understanding and greater
perspective of the development of agency theory. To address the second question, we
identify areas of scholarship where agency theory lacks explanatory power which calls into
question the usefulness of agency theory as a foundational management theory. The
contributions of the manuscript are three-fold. First, by answering these questions we
contribute to the management and entrepreneurship literatures by identifying the evolution
of agency theory as a means to help unpack why and how agency theory does and does not
explain certain phenomena. Second, we identify research streams that pose boundary
conditions for agency theory extensions and present the implications of these conditions as
shortcomings of the theory. The entrepreneurship and family business domains may offer
fruitful and unique grounds for examining complicated principal-agent issues but they are
domains that agency theory currently fails to thoroughly address. By integrating these
literatures with agency theory we conclude that while agency theory is partially useful in
examining these domains, some serious flaws exist. Finally, we contribute by identifying
disconnects between scholarly identified agency relationships and the use of agency theory
in practice, as will be explained in greater detail by providing extensions and examples of
these disconnects via boundary conditions, implications, and hence subsequent alternatives.
The remaining sections are ordered in the following manner: we provide a brief review of
agency theory which offers a lens for readers to use in order to follow the evolution of the
theory. Following this review, we uncover the underpinning events, people and actions that
propelled agency theory into existence, providing, in part, rationale as to why certain areas of
entrepreneurship and modern business are not well explained by the theory. Following this
section, we juxtapose the usefulness and the drawbacks of agency theory in the domains of
MD strategic entrepreneurship, social entrepreneurship, and family business. Last, a thorough
54,1 discussion integrates the purpose of the manuscript by presenting the five major boundary
conditions and implications which stem from these conditions.

Review of agency theory

Scholars use agency theory as a contract for the unit of analysis between principals and
176 agents. Principals delegate work to agents, anticipating that agents will complete these
demands in the principals best interest (Eisenhardt, 1989; Jensen and Meckling, 1976).
Agency theory is based on the relationship between one party, the principal, who
designates certain tasks and decisions to another party, the agent. The focus of agency
theory stems from assumptions that the agent will behave opportunistically, particularly if
their interests conflict with the principal (Mitchell and Meacheam, 2011, p. 151). The
pursuit of similar interests is not always evident between these two parties causing an
agency problem. When different interests arise, necessary attention must be directed to
resolving this conflict. These differences are difficult to measure and require governing
mechanisms to facilitate congruence and shared risk (Arrow, 1971). Accordingly, the focus
of agency theory has been on the potential conflict between the agent and the principal.
One of the primary reasons why conflict emerges is that work contracts are imperfect since
not every single contingency can be accounted for; monitoring is difficult and costly, and as
such, the principal may have difficulty enforcing their property rights (Eisenhardt, 1989).
The Modern Corporation and Private Property (Berle and Means, 1932) is a seminal
precursor to agency theory. Their thoughts on economic power, ownership, control,
modern corporate structure, and shareholders were fundamental to agency theory
development and in the 1970s, economically minded scholars revived these thoughts
and ultimately created the agency theory perspective (Fama, 1980; Fama and Jensen,
1983; Harris and Raviv, 1978; Jensen and Meckling, 1976).
James Burnham (1941) took a grim view of managers and suggests their actions are
self-interested and opportunistic. Though not often cited in agency research, these
assumptions are very consistent with agency theory by questioning managerial
intentions. Agency theory is founded on seven fundamental assumptions: self-interest,
goal conflict, bounded rationality, information asymmetry, preeminence of efficiency,
risk aversion, and information as a commodity (Eisenhardt, 1989). These assumptions
overlap and build on numerous preeminent articles and theories. Comparison is outside
the scope of this paper, although readers may find interest in comparing agency
assumptions with transaction cost theory, stakeholder theory, and contingency theory.
Two forms of agency theory have developed: positivist and principal-agent ( Jensen,
1983). Positivist researchers have emphasized governance mechanisms primarily in large
corporations. For example, Davis et al. (1997, p. 23) note to protect shareholder interests,
minimize agency costs and ensure agent-principal interest alignment, agency theorists
prescribe various governance mechanisms. These mechanisms are generally emphasized
by positivist researchers and usually focus on executive compensation and governance
structures ( Jensen and Meckling, 1976). The second stream, principal-agent, while
sounding precisely applicable to our line of research, is more concerned with technical and
mathematical relationships that details the specifics of the contract between the principal
and the agent. In other words, the focus of principal-agent is to determine the optimal
contract (Eisenhardt, 1989). Hence, our manuscript utilizes a positivist lens.
More broadly, the positivist stream can be expanded to various principal-agent type
relationships. Scholars have expanded the principal-agent problem to consider a whole
host of other issues that emerge. For example, Smith and Warner (1979) identify
principal-principal conflict between bondholders and shareholders. Mills (1990) does so Agency
through client-service conflicts whereas Mitchell and Meacheam (2011) do so through theory
principal-knowledge worker conflicts. Principal-agent relationships need not be bound
to shareholder-CEO relationships and can be applied as a more general theory
(Eisenhardt, 1989). Harris and Raviv (1978) describe an agency paradigm expandable
to employer-employee and insurer-insured. Hill and Jones (1992) suggest agency
relationships explain many other contractual relationships among stakeholders. Given 177
the potentially long list of conflicts, greater emphasis on the specific governance
mechanism used to manage these relationships is needed.
Over time scholars have narrowly applied agency theory, resulting in a disconnect
between agency problems and agency theory. Agency relationships apply to a wide
host of aforementioned settings, whereas agency theory is too often reduced to
shareholder-CEO relationships. In this manuscript, we unify the various agency
problems with theory by exploring influential events and people while also
emphasizing the use of governance mechanisms. On one hand, by extending beyond
the typical settings linked to agency theory (e.g. shareholder-CEO relationships), we
illustrate how the theory could help explain principal-agent issues in entrepreneurship,
family business, and other modern phenomenon. On the other hand, this integration
also raises some serious questions and concerns about the theorys usefulness to
explain the duality of principal-agent roles in the modern business environment.

Fundamental influences
When dealing with the nature of humans, many assumptions in agency theory (e.g.
bounded rationality, information asymmetry) are present throughout history. Though
not all-inclusive, many important contributions between the Industrial Revolution and
the twenty-first century are present in the following account of agency theory in the USA.
The following sub-sections attempt to identify seminal events and people important to
the evolution of agency theory. These events provide a multitude of antecedents and
insights to modern day studies and uses of agency theory. The following will reveal the
events that took place and also provide examples of agency conflict far before scholars
coined the term, agency theory. Subsequently, we are able to note time periods in which
agency theory was useful and had explanatory power such as the Industrial Revolution.

Industrial Revolution
Mechanical revolutions consistently progressed throughout history. Continuously
inventing and refining objects was common practice. With the Industrial Revolution,
however, came major social, political, and economic changes in the lives of many
(Wells, 1922). The Industrial Revolution started in the mid-eighteenth century and
continued into the nineteenth century, radically transforming and enriching society.
Much technological advancement in agriculture, mining, transportation, and
manufacturing occurred around this same time (namely, discoveries such as the
steam engine, cotton gin, telegraph, sewing machine, telephone, and the internal
combustion engine). The steam engine was of particular importance. Not only did
James Watts patented steam engine dramatically propel the Industrial Revolution by
providing a power source to factories, but his company also discovered and
implemented managerial techniques (Pindur et al., 1995). These discoveries not only
changed the shape of US industry, but also provided major lifestyle changes. As cities
grew, no longer would a majority of the US workforce consist of subsistence farmers.
Many workers began moving to cities and quality of life was improving both in
MD lifespan and wages (Cooper, 1990). The technological expansion and creation of mid-
54,1 and large-sized businesses dramatically changed a once very rural life in the USA.
From an agency theory perspective, it is important to begin with the significance of
the Industrial Revolution, as it directly influenced the increasing size of organizations.
No longer could a business be run by a single entrepreneur, but rather a professional
cadre of managers. In other words, these large organizations needed to employ
178 mechanisms to ensure the completion of detailed work tasks across the organization.
Managers posed an interesting conundrum for owners. How could owners get
managers to act in their stead? How could managers motivate employees under their
supervision to act in the best interest of the owners? Prior to the Industrial Revolution,
management as a discipline was not formally studied as most business tended to be
small entities (Wren and Bedeian, 2009). Burnham (1941) explains that until larger-scale
enterprise was developed, industry did not require professional managers. Large,
modern organizations must employ various middle and top managers to monitor and
coordinate work under their control (Chandler, 1977). These managers were charged
with dividing the work effort in a manner to support the interests of the owner(s).
In doing so, a layering of the leadership within the organization created potential
principal-agent conflicts at each management level. Large organizations needed to
clarify expectations at each level to minimize conflict. They needed to create governing
mechanisms that drove behaviors leading to desired outcomes for the owners.
Without these fundamental changes, created by the Industrial Revolution, a great deal
of the conflicts in agency theory would have never taken place. Post-revolution, firms
would continue to grow until reaching a size where an owner could no longer be in contact
with all phases of a business, such as buying, manufacturing, selling, and engineering
(Litterer, 1961). Many more specific examples occurred during this time period. For one,
department heads displayed opportunism by withholding information from other
managers, creating jealousy and manager-manager conflict (Litterer, 1961). Information
asymmetry drove organizations to focus on ways to encourage managers to work together
for the greater good of the organization, which created a need for mechanisms that would
minimize information hoarding and emphasize shared objectives. The Industrial
Revolution set the stage for creating a theory such as agency. Ideas about management
were relatively new and the development of agency theory provided a useful means for
explaining these new issues. Other events were also critical to shaping agency theory, so
now we turn our attention to another foundational event, the creation of the stock market.

The stock market

Various informal forms of stock markets were present centuries before the creation of
the New York Stock Exchange (NYSE). For example, resembling modern day
commodity traders, Mesopotamians formed trading companies hedging grain sales
(Sobel, 1965). Although primitive, early mechanisms of compensation and governance
were likely present in some form. Banner (1998) examines the origins of the NYSE and
traced its initial presence to coffee house meetings in New York City in September 1791.
Various meetings took place, such as the Buttonwood agreement (Wright, 2002), and
trading continued without regulation until brokers more successfully organized in
1817. Initially, there were 17 governance rules put in place under the NYSE, and by
1860, the NYSE established prices nationwide and was widely recognized as a measure
of national economic health (Banner, 1998).
The separation of ownership and control, created largely by the emergence of stock-
offering companies, is a fundamental concept in agency theory as it is a formal
governance mechanism used to protect stockholders from opportunistic owners and Agency
managers. Berle and Means (1932) articulate problems legal owners incur when they theory
are separated from control over large enterprises and they explained how the USA
transferred control from owner to management (Schwarz, 1987). We see ownership and
control conflicts throughout time, but as stock markets were created, complexities
arose. The history of events creating markets plays a key role in the development of
agency theory. Shareholder-CEO conflict develops from this separation, as does 179
concern regarding unaligned interests. Principal-principal conflicts also arise due to
various and potentially conflicting investor interests. Governance mechanisms gain
importance from the emergence of public corporations, primarily through boards of
directors and executive compensation. Compensation is identified as a means to control
managerial opportunism and coordinate executives and shareholders (Barnard, 1938).
It is notable that compensation coordination appears to be expandable to many agency
relationships beyond shareholder-CEO relations as it attempts to satisfy both
principals and agents.
The development of a stock market allowed for the principal-agent context to
become more important, since it allowed for the creation of further owners. A major
push of the Herbert Hoover administration was to create an ownership society, where
everyone owned a portion of the economy through stock ownership (Schlesinger, 1958).
The significance of this development was that ownership was no longer in the hands of
entrepreneurs such as Carnegie or Rockefeller, or even financiers such as J.P. Morgan.
Rather, it was a diverse collection of owners and individuals. Hoovers administration
viewed stock ownership as one mechanism to govern the self-serving behaviors of both
principals and agents (Schlesinger, 1958). This vision also spread ownership and the
risks associated with ownership across a myriad of owners. The agency problem
emerged partly from the fact that stock ownership was based on market solutions,
where trust and alignment of interests were more difficult than individuals had
believed. The shift of ownership due to the stock market paved the way for a theory
that addressed such conflicts. However, other influences of new governance
mechanisms, such as organized labor, also impacted agency theory.

Organized labor and unions

The latter decades of the nineteenth century witnessed a great deal of conflict between
labor and management. Conflicts occurred within many industries, including railroads,
mining, steel, and meatpacking. Working conditions, hours, and rate of pay were often
at the heart of labor-management conflicts. Organized labor and unions arose out of the
need to establish rules to govern things such as working conditions, hours worked, and
rate of pay. At the time, employees perceived an imbalance in their interests (safety,
work hours, fair wages, etc.) with those of the owners (profit, growth, etc.). From the
employees perspective, formal rules and guidelines were necessary to ensure safer
work conditions and equitable pay. The National Civic Federation attempted to
mediate disputes, inform the public regarding management labor relations, and
demonstrate that the two parties had mutual interests (Wren and Bedeian, 2009).
Despite ongoing efforts and negotiations in the 1920s and 1930s, labor and
management continued to grow distant. These decades saw the birth of legal rights
granted to unions through the Wagner Act (Badger, 1989) as well as a uniting of the
working class due to popular culture (Cohen, 1990). One of my trade union friends told
me that he remembered when he was a quite small boy hearing his father, who worked
in a shoe-shop, railing daily against his boss. So he grew up believing that it was
MD inherent in the nature of things that the workman should be against his employer
54,1 (Follett, 1926, pp. 133-134). This thought process is problematic to the organization and,
therefore, not in the best interest of shareholders or workers. Manager-worker conflict
and owner-worker conflict are at the core of this agency problem. Unions were formed
to better align the conflicting interests between managers and workers. Cooperation
remains critical, and if workers are aligned with the organization, their loyalty will
180 increase the likely acceptance of the objectives (Simon, 1997). Information asymmetry
and opportunism are also both present. Manager-worker and owner-worker conflicts
have persisted since biblical times; the conflict is not specific to the agency problem, it
has been a problem longer than anyone can recall. Whereas the problem has persisted
across centuries, the onset of organized labor and unions offered the employees a new
governance mechanism (i.e. one in which agency theory had reasonable explanatory
power and), one which organized labor could utilize to improve working conditions,
influence work schedules, and demand appropriate compensation. Almost
simultaneously, in a post Industrial Revolution economy, we have the onset of the
stock market, organized labor, and yet another element that set the substructure for
agency theory, scientific management.

Scientific management
Appropriately, this section begins with Frederick W. Taylor. Taylor, an engineer, who
strived for efficiency, did so through facts and objective experiments. His major
contributions and focus were on time studies, standardized tools and procedures,
monetary rewards, individualized work, training, selection of first-class men, and rest
pauses (Locke, 1982). Taylor believed scientific management offered the opportunity
for shorter hours, better education, increased compensation, and an improved quality
of life for workers. In pursuit of scientific management thinking, Taylor introduced a
new form of governance mechanism known as standardized work.
Taylors work affected the agency problem in two critical ways: through his process
and through those who mimicked or expanded on his work. The process of his studies
created worker conflicts as certain workers were getting paid more to participate in the
studies. Workers with higher output were sometimes identified as the standard
producer, making those workers with lower output standout to management.
The process also created owner-manager conflict as the owners were modifying
managements duties. Managers were often asked to improve the performance of
individuals, not just the group. Although workers were receiving higher wages, there
was still conflict with owners, as they were collecting much greater profits. Worker-
management conflict also increased because worker conditions became more mundane
(Klaw, 1979). The second contribution of Taylors work to early agency relationships
was through the many spin-offs of scientific management. Despite Taylor claiming his
processes never led to union conflicts or strikes, this was not the case for all
practitioners of various forms of scientific management (Wren and Bedeian, 2009).
Scientific management was a seminal part of management in the late nineteenth and
early twentieth centuries. Its development was not without problems and, as
mentioned, many agency conflicts were present throughout this time period. As a
consequence of this movement, the various studies, and experiments conducted
provide insight to early principal-agent disconnects. If we view governance
mechanisms as a swinging pendulum, organized labor and unions swung the
pendulum in favor of employees (agents) whereas scientific management primarily
swung the pendulum in favor of owners (principals). While the type of governance
mechanism shifts, the role and significance of such mechanisms remains of paramount Agency
interest. The role of scientific management in pushing forth agency theory was theory
fundamental and of ideal timing, occurring alongside the Hawthorne Studies and
human relations movement and just prior to the release of The Modern Corporation
and Private Property (Berle and Means, 1932).

The Hawthorne studies and human relations 181

From 1924 to 1933, the Hawthorne studies were conducted, becoming among the most
famous studies in management research. These studies were held at the Western
Electric Company and led by Elton Mayo and Fritz Roethlisberger who are generally
credited for initiating the human relations movement in industry (Muldoon, 2012).
Ultimately, the studies major conclusion was that human-relations are valuable, and
people are motivated by more than money (Greenwood et al., 1983). These studies bring
human relations to the forefront of management theory and few would doubt that the
Hawthorne studies were seminal in the development of management and represent an
attempt to alleviate worker-manager conflict. More specifically, if agents are motivated
by more than money, how do organizations identify these motivations? Also, how could
organizations use these motivations as mechanisms to drive desired behaviors?
The Hawthorne studies represent a social advancement for workers and, in a way,
resolve some of the agency conflict present between managers and workers. The
governance mechanisms here require a different hand, one that requires flexibility and
compromise. For instance, one of the particular issues of agency that was discussed
during the Hawthorne studies was the Man in the middle problem. This represented a
unique agency issue common to the first line manager in that they may have issues
fulfilling their managerial role due to social pressures exerted by workers. The
Hawthorne researchers sought to provide a forum where workers and management can
find some common ground. Common ground is not often defined in typical principal-
agent contracts. The outcome of a compromise may lead to several different variations of
principal-agent contracts. Mayo sought to do this through the training of managers so
that they focussed on cooperation and harmony rather than competition and discord. By
focussing on social interventions, a compromise is possible. This is far from the most
commonly discussed shareholder-CEO agency conflict. It represents, however, the
beginning of human-relations, which offered great potential to reduce the gap between
manager-worker asymmetry and conflict. This focus on human relations is an important
component in reducing agency conflicts between owner-worker and manager-worker.
The Hawthorne studies represents only one school of thought in the human
relations movement. One of the most important contributions to human relations came
from an executive, Chester Barnard. Barnards argument is that the corporation is
based on cooperation and that the main function that the executive performs is to
ensure cooperation within the organization. Yet Barnard also pointed out that such
cooperation is rare. Only a few organizations are able to achieve adequate levels of
cooperation to survive. This occurs because individuals are often able to form informal
organizations (a finding expanded on from Mayo and the Hawthorne studies) as a
means of maintaining their own personality in the face of organizational influences.
The role of the executive is to ensure cooperation through communication and
incentives. Through both, executives could ensure individuals will follow orders. Yet,
this influence is limited. Orders will only be followed when individuals understand the
order, which serves the followers and the organizations interest. Hence yet again the
agency problem is a dominant theme in the era of human relations. Both Mayo and
MD Barnard understood that workers-managers have the ability to bond together in the
54,1 face of following orders. In this vein, compromise acts as a governance mechanism that
minimizes principle-agent conflict and influences agency theory yet the organization
then was less rational than scholars of the previous era had believed.
In summary, our journey through various managerial and economic events offers
greater insights into agency theory yet will also shed light on some limitations agency
182 theory faces in the modern business environment. We began with the Industrial
Revolution where the growth in organizational size fueled a need for professional
managers, as owners and entrepreneurs could not monitor every detail. The layering
of organizations gave rise to various types of agency problems that required governing
mechanisms. In what followed, a discussion of the stock market and how stock
ownership in publically traded companies served as a means to govern the behaviors of
company executives and boards of directors. Then, an overview of organized labor
illustrated how employees (agents) created governing mechanisms, in the form of
unions, to ensure that the interests of the employees were satisfied. A walk through
scientific management revealed the use of standards to help govern worker activity
and pay, which led to higher profits for owners. A discussion of the Hawthorne studies
and human relations concludes our section on fundamental underpinnings. The human
relations movement identified compromise as a governing mechanism to minimize
agency issues. In doing so, this perspective illustrated the importance of understanding
human motivations and often, those motivations extend beyond financial incentives.
The next section calls into question the use of agency theory, more specifically the
theme of governance mechanisms, into entrepreneurship and family business. Our
intentions are two-fold. First, we wish to acknowledge that the positivist perspective of
agency theory only partially explains entrepreneurship and family business. In doing
so, we describe the role of governance mechanisms and the need for more agency
research emphasizing such mechanisms if the theory is to explain entrepreneurship
and family business. Second, by attempting to extend the use of agency theory beyond
that of the traditional large corporation, we encounter certain boundary conditions that
limit the theorys explanatory power of current business phenomena. Strategic
entrepreneurship, social entrepreneurship, and family business are areas rich with new
agency problems, yet, in its present state, agency theory offers only a partial
explanation (at best) of these agency problems.

Entrepreneurship and family business

Our evolutionary journey through agency theory focussed on the use of governance
mechanisms and the role such mechanisms play in minimizing principal-agent
conflicts. We now turn our attention to strategic entrepreneurship, social
entrepreneurship, and family business. These areas of study all present their own
complex agency problems and we purport that while agency theory may have some
viable explanatory power, it lacks comprehensiveness thus limiting its usefulness in
these realms.

Strategic entrepreneurship
Much of the past research has focussed on equity-based governance mechanisms in
large firms such as managements equity (Walking and Long, 1984), executive stock
holdings (Agrawal and Mandelker, 1987), or employee stock ownership (Barney, 1988)
and so forth. The primary interests of these studies investigated the
opportunity-seeking behavior of managers, executives, and employees, respectively. Agency
However, if we are investigating entrepreneurial ventures, there is an additional theory
behavior of relevance, one that focusses on advantage-seeking behaviors.
Whereas large established firms look to management for managerial and
organizational expertise, entrepreneurial ventures also require management to
provide knowledge and human capital. Entrepreneurial organizations are constantly
seeking ways to leverage innovation as means to disrupt markets. This strategic 183
approach requires a different way of thinking and acting, which poses different agency
issues. Strategic entrepreneurship involves both opportunity-seeking and advantage-
seeking behaviors (Ireland et al., 2003). In this realm, ownership of knowledge and
access to human capital, which could provide the organization with competitive
advantages, may not be owned nor controlled by the firm. Given this, how is the
relationship among top executives affected?
In theory, the firm engages in innovative activities in pursuit of competitive
advantage (Audretsch et al., 2009). Investigating the motivations of individuals is
complex enough, but those complexities are compounded when simultaneously looking
at opportunity-seeking and advantage-seeking behaviors that are not owned by the
organizations. For instance, consider if an entrepreneurial firm hires a CEO who has
multiple patents registered in her name. The entrepreneurial firm sees complimentary
value in patents the firm could leverage with existing products resulting in synergies
and competitive advantages. Should the firm hire the CEO or simply purchase the
rights to access the patents?
From a positivist perspective, contract variations could exist in this scenario, each
with a different level of control for the firm and the patent holder. First, the firm could
simply purchase licensing rights to use the patent. In this regard, the firm has
specifically what it wants (e.g. access to the patent technology), but no access to the
knowledge or human capital possessed by the patent holder. The patent holder would
maintain full control of her work and would be free to engage in other self-interested
behaviors to maximize utility. The governance mechanisms here would likely be simple
and straightforward to outline the conditions of the license.
Second, the firm could extend an offer to the patent holder, as CEO of the firm.
The resulting contract could take one of many shapes. In this case, the maximum
utility from the patents would likely come through some type of equity ownership for
the CEO, in addition to some level of strategic decision-making regarding the use of the
patented technology. These necessary governance mechanisms are more complex and
require careful consideration. For example, if the CEO is offered little or no strategic
decision-making input for the use of this or future patents, the mechanism intended to
benefit the firm may stifle her desire to create new innovations. Since entrepreneurial
firms rely on innovation to survive and grow, this could be a detriment to the firms
future performance. In order to obtain competitive advantages, organizations must
possess or control key resources.
Nonetheless, agency theory has a role in explaining how organizations gain control
and use resources. In looking at its role in entrepreneurial firms, we illustrate how the
need for opportunity-seeking and advantage-seeking behaviors in strategic
entrepreneurship could bring about other agency problems. Thus, the different agency
issues create a need to create differing governance mechanisms. The duality of assessing
both opportunity and advantage seeking behaviors is complex and we call into question
whether agency theory is robust enough to explain both perspectives. In lieu of looking
for the optimal contract as proposed by organizational scholars and micro-economists,
MD for entrepreneurial firms, we argue that a balance, steeped in compromise is needed.
54,1 Compromise is the glue that will allow organizations to continue to be innovative while
growing and addressing the interests of principals and agents alike, yet in its current
form, agency theory is inadequate in its discussion of compromise.

184 Social entrepreneurship

While strategic entrepreneurship provides insight into entrepreneurial ventures, there
are numerous types of entrepreneurial ventures that pose unique agency issues. One in
particular, social entrepreneurship, has gained attention in popular press and academic
research (Short et al., 2009). From a popular press perspective, the USA is fertile ground
for feel-good stories, where solutions to a social problem are of interest. On the
other hand, academic research is enamored with offering theoretical explanations
for human and organizational rationale. Hence, social entrepreneurship provides
a promising foundation for both.
For our intents and purposes, we view the primary mission of the social
entrepreneur as creating societal value by addressing and solving social problems
(Dacin et al., 2011). Personal compassion (for those affected by social problems) is at the
heart of social entrepreneurship (Dees, 2007). Also, at the core of this mission is a nexus
of potential agency issues, as social entrepreneurs wrestle with organizing market-
based resources to address social problems.
Social entrepreneurs can be viewed as embedded agents (Holm, 1995; Seo and Creed,
2002). In other words, various institutional forces are at work, providing motivated
individuals (namely, those who possess the cognition and access to capital) the
opportunity to engage in entrepreneurial agency. Given the multitude of interests and
motivations, the social entrepreneurial process has multiple bottom lines (Grimes
et al., 2013). As a result, complex agency issues exist requiring unique governance
mechanisms.
Typically, central to complex social problems, a vulnerable party exists. For
instance, in the USA, childhood hunger is a looming social problem. At the crux of the
problem, children are unable to function to the best their ability at school (or in life) due
to malnourishment. In this case, the children and their plight, provide the compassion
that drives the social entrepreneur. Since social entrepreneurship is bringing to bare
institutional resources (e.g. federal grant money, financial and other tangible donations
from businesses, private employee volunteer hours), agency issues may arise among
many principal-agent relationships.
These agency issues require sophisticated governance mechanisms to ensure that
the mission is not compromised due to the mishandling of resources. At times, the
social entrepreneur may play the role of agent (namely, when receiving funds and
grants from corporations and other agencies) or that of the principal (namely, when
distributing resources to those in need). In its current state, we call into question
whether agency theory explains both roles for the same individual. From our
perspective, there are grounds for partial explanation, yet, to what degree is still
unknown? At present, agency theory offers reasonable explanations of behaviors of
independent principals and agents. However, complexities arise when an individual
may be a dual principal/agent. While agency theory may offer insights from the
perspective of an individual principal and separate agent, social entrepreneurship
illustrates the failed linkage between theoretical developments and the use of the theory
to explain actual agency issues.
Family business Agency
Third, we address the usefulness of agency theory in regards to family business. theory
If governance mechanisms limit the agents self-serving behavior (Eisenhardt, 1989),
what mechanisms are in place to limit the self-serving behaviors of family business
owners? From the perspective of owner-manager agency costs, family owners most
often possess the knowledge and votes to limit managerial exploitation (Anderson and
Reeb, 2003). However, is the same true when there are varying levels of ownership 185
within the family? Additionally, family business owners wish to maintain control of the
firm to satisfy family objectives such as wealth, status, or power (Claessens et al., 2002).
Furthermore, family business must occasionally address the rotten child theorem
(Becker, 1974) which states that families often support (i.e. employ) rotten children
due to reasons related altruism. In other words, from the perspective of agency theory,
a family may support a bad agent, even at a cost. As with such, difficult to assess
agency issues exist.
When there are multiple family owners in a business, agency issues are more
problematic as family owners have parochial agendas that may be at the expense of other
shareholders (Bertrand and Schoar, 2006). For instance, if the majority family owners are
more concerned with providing employment to future generations, they may not be
inclined to hire the most qualified employees. This action is not in line with the intentions
of the other shareholders who likely emphasize profit maximization. Subsequently, the
action may result in suboptimal company performance that may lower returns for
minority shareholders. In this instance, the usefulness of agency theory is questioned.
Do the principals holding a majority of power now act as a majority principal and the
remaining minority holders of power act as agents? In its present state, the theory lacks
sufficient explanatory power to address this complex issue and the underpinnings that
articulate the evolution of agency theory offers little insight.
Furthermore, as a family controls the business via a super voting share structure, its
voting rights exceed its cash flow rights and agency costs rise (Le Breton-Miller and
Miller, 2009). Given this, the family controls the business without assuming the costs or
risks typically associated with ownership (Morck et al., 2004). The lack of alignment
with risk and reward may lead to decisions that benefit the family, but not the business.
Thus, in its current state, we question whether the theoretical arguments that agency
theory addresses are aligned with the practical problems of familial ties and the duality
of living as family and operating a family business.
With these looming challenges, a number of questions regarding governance
mechanisms are of paramount interest. First, what motivates a family business to employ
governance mechanisms to help police overzealous family behavior? Since many family
businesses are private companies, this challenge may seem insurmountable. A possible
solution could lie in the education of family owners. More specifically, continuing
education courses geared to assist family business may be a fruitful start. We expand
upon this in our discussion, limitations, and future research section. Second, borrowing a
page from the principal-agent perspective, a detailed contract, specific to the familial
situation may hold value. In this instance, the contract will specify details of ownership in
an effort to mitigate owner-owner agency issues. However, if we consider familial
interests, the contract would be overly complex at best, but more likely, not sufficient to
address the needs of all parties involved. Therefore, such a contract is not likely to be
signed by anyone. Nonetheless, these conflicts still exist and one must question the
usefulness of agency theory as a foundational theory to address the complicated
relationship issues inherent in family businesses.
MD Discussion
54,1 Todays globalized economy presents additional complexities to various agency
relationships that did not exist 80 years ago when Berle and Means (1932) did the
majority of their work. Modern topics such as continued technological improvements,
the entrepreneurial mindset, differences in education, and ever-changing media and
government relationships with business pose potential threats to the long-term
186 viability of agency theory as a means of explaining complex principal-agent
relationships. By examining the background of agency theory we have shed light on
the development of some of its fundamental aspects. This is important to demonstrate
why the theory was once well positioned to explain business happenings and
phenomenon at the time. However, as expected, business has evolved necessitating the
urgency to advance current theories as well as develop new theory that better explains
the current business environment, when appropriate (Zingales, 2000). Accordingly we
set out by asking two questions: first, what are the underpinnings of agency theory;
and second, what are the boundary conditions and implications for agency theory
having been developed nearly a century ago? By giving attention to these questions we
believe to have contributed to the literature by presenting a deeper understanding and
unpacking the theory by addressing the environment during its origination; explaining
the evolution of the theory as it applies to management and entrepreneurship research;
and identifying boundary conditions of the theory which lead to certain shortcomings,
implications and future research for both research and practice. In the follow
paragraphs we discuss five agency problems where the modern business environment
appears to at least partially baffle agency theory and agency theorist. For an overview
of the forthcoming boundary conditions and implications, please see Table I.
First, we would be remised if we did not discuss those challenges posed by innovative
corporate thinking. For instance, when UPSs unionized employees went on strike in
1997, FedEx began to gain market share by using independent contractors (see Witt and
Wilson (1999) for a more detailed overview). This example, in accordance with our
strategic entrepreneurship section poses new types of principal-agent problems. In this
case, FedEx engaged in an aggressive campaign to integrate the Roadway Packaging
Systems business into the FedEx business model. This drive for integration resulted in
standardization of trucks, contractor uniforms, and route details, among other activities,
to provide a consistent experience for FedEx customers. On the surface, these
integrations seemed logical; however, when independent contractors began to
complain, a new type of principal-agent conflict emerged, one that agency theory may but
has not yet explained. From the independent contractors perspective, FedEx was
treating them like employees, but not compensating them as such. From FedExs
perspective, these requirements were in the best interest of the independent contractor
and the company because it protected the brand image of the organization. Due to these
differences in interests, several independent contractors in various states brought a class-
action lawsuit against FedEx claiming that the company was violating labor laws.
Perhaps agency theory could offer a solution for the independent contractor issue at
FedEx (namely, via compromise), but it may offer more questions than answers. In the
modern business, companies are scrutinized for overzealous advantage-seeking
behaviors, especially those where the company is pitted against an individual (e.g. as
seen in the independent contractor example). Lawsuits, regulatory fees, and the opinion
of public court span beyond the principal-agent contract, as defined in agency theory.
Second, as social entrepreneurs assemble resources to address social problems, an
entirely new nexus of principal-agent issues arise. While many businesses will accept
 Boundary
Agency
Domain Agency problem condition Implications Future research theory
Strategic The duality of Ever-evolving legal Firms using Further refine
entrepreneurship addressing both issues associated contract and 1,099 theory to account
opportunity and with common employees for new principal
advantage seeking employment challenge agency and agent
behaviors in firms, relationships blur presumptions employment 187
especially those the defined pointing to a relationships
engaged in relationship disconnect between
fostering between principal theory and practice
innovation and agent
Social Dual bottom lines The ability to Limitations exist Consider using
entrepreneurship of social address multiple with interpreting aspects of social
entrepreneurs shift contracts and actions associated exchange theory
their role from relationships with dual roles; and network
principal to agent simultaneously limited explanatory theories to explain
to benefactor power complexities
Family business Differing priorities Sole focus on Complex issues of Expand theory to
of majority and economic family relations more clearly
minority family motivations and and business are address family
owners intentions while intertwined, yet dynamics
Family altruism ignoring familial only addressed Potential use of
may benefit family obligations from an economic sociology-based
members, yet perspective theories in lieu of
jeopardize family agency theory
firm performance
Social media Information The use of socially No enforceable Need theoretical
asymmetry is intended contract present for development to
created from social information as a potential agents; include implied
posts basis for screening enforcing or contracts (potential
Legal and moral and monitoring adjusting contract agents) and
issues associated actual and potential terms based on monitoring
with the agents unverified and provisions (actual
monitoring of potentially agents)
actual and potential inaccurate
agents information
Evolving Addressing the The ability to The economics- Examine network
stakeholders specific and often handle multiple based perspective theory and the
conflicting interests from of agency theory closeness of ties to
objectives of stakeholders provides a limited establish a more
multiple understanding of robust account of
stakeholders differing various Table I.
Reduction of stakeholder stakeholders with Summary table of
principal relationships and differing interests agency problems,
information values boundary conditions,
asymmetry levels implications, and
playing field future research

some form of a socially constructed challenge for the greater good, agency theory in its
current state does not adequately address those motivations. From a pure economics
perspective, companies would only engage with social entrepreneurs for the sheer
benefit of future profits. However, addressing issues to socially driven problems are
often complex and may extend for an indefinite period of time. Hence, it is not likely
MD that engaging in these activities will result in profits. Accordingly, why do companies
54,1 engage? The answer could lie in the core values of the organization, which is at the
heart of the companys social and moral compass. However, what the company is and
what they intend to be is not part of the agency theory conversation. To better
understand these motivations, social exchange theories, in conjunction with a more
economics-oriented agency theory may provide more insights for agency theories.
188 Thus when considering the perspective of the social entrepreneur, the role of principal-
agent is often blurred. At times, the social entrepreneur acts as a principal to potential
benefactors of her efforts. Yet, when dealing with companies and government agencies,
she may be more of an agent. The duality of the role played by the social entrepreneur
is not in a vacuum, where it is clear which hat may be worn at any given time. Instead,
the social entrepreneur is at this nexus of this principal-agent intersection and the
issues that stem from this intersection are very real and complex. Agency theory is
equipped to address one-on-one relationships, yet struggles with many-to-one
relationships as with the social entrepreneur. New theoretical developments are
needed to offer explanation. In cases where the theory is severely constrained, other
theories may be more appropriate to further explain these complex principal-agent
issues (e.g. network theory, or sociology-grounded theories).
Next, family businesses pose new and challenging principal-agent issues because
the matters of family extend beyond the sometimes-limited economic leanings from
agency theory. Agency theory assumptions often ignore the significance of social
realities by placing emphasis on self-interest and economic opportunism (Granovetter,
2005). Thus, the social issues associated with familial ties are minimized and often
misunderstood. In some instances, the primary owner of the family business may
sacrifice economic gains in pursuit of family harmony. Yet, agency researchers have
noted that family businesses are more likely to experience performance issues due to
underinvestment and company cultural issues stemming from nepotism as family
business owners extract valuable resources for personal gain (Le Breton-Miller and
Miller, 2009). However, what is missing from this perspective is consideration of the
socially embedded links to family. True, an underinvestment in the business may result
in a suboptimal financial performance, but the underlying motivation may have no
bearing economically. While there are clear principal-agent issues in the family
business, limiting ones vantage point from only an economic perspective will not
unearth the socially embedded issues that may drive decisions within the family firm.
In this case, perhaps other theories such as social embeddedness and stewardship
theory may be better suited to address principal-agent issues in family business, in lieu
of the economics-based agency theory. Given family businesses make up a significant
part of most economies, hence warranting increased attention from agency theorists.
Thus far we first explored the underpinnings of agency theory which are a necessary
and important aspect of understanding the future and developing theory (Booth, 2003;
Lamond, 2005). Second, we provide and discuss areas in entrepreneurship that present
difficulty to agency theory such that the theory only partially explains strategic/social
entrepreneurship and family business. Lastly, we shed light on modern phenomenon that
agency theory poorly explains: social media and modern stakeholder relations. Social
media provides an inexpensive and convenient means of broadly communicating
information to multiple audiences simultaneously. Individuals and organizations use
social media to inform followers of happenings deemed of interest. Given the public
domain of these media outlets, social media sites are increasingly being used as a means
to screen candidates for jobs (Brown and Vaughn, 2011) and monitor applicants seeking
admission into colleges and universities (Vatamanescu and Constantin, 2015) hence Agency
creating newfound principal-agent issues. In the case of college students seeking jobs, the theory
students and HR professionals from the hiring companies have conflicting views of the
ethical nature and perceived value of said screening (Curran et al., 2014). Yet, legally,
companies are within their rights to use social media in its screening of potential
candidates. This invites questions of boundaries and governing mechanisms needed to
prevent and control misuse. Powerful theories are generally capable of providing useful 189
explanation for evolving phenomenon. However, agency theory appears to be limited in
accomplishing this task. Given the numerous potential principal-agent contract
variations possible, open-mindedly approaching this issue is necessary. Seeking an
optimal contract for an employers use of social media in screening candidates could lead
to undesired legal challenges. Furthermore, the disparity in the perceived value of the
information posted on social media sites creates information asymmetry, which is at the
heart of principal-agent conflicts. College students perceive the information contained in
most posts as meaningless, while corporate recruiters view these posts as sources rich
with ethical information about potential employees. We contend that agency theory has
fallen short in explaining this phenomenon and more work to understand the governing
mechanisms associated with these relationships is needed.
Finally, new stakeholder problems also represent modern business phenomena and
are at odds with traditional agency problems. Changes in the economy and technology
have educated stakeholders of their power and businesses responsibilities toward the
community. Managers are also faced with the responsibility of balancing multiple
interests including recognizing the importance of human capital within organizations,
which is often the most important factor in building a competitive advantage (Pfeffer,
1998). Agents have to spend time and energy dealing with potential problems with
workers, since workers have an easier time of enforcing their property rights (i.e. not
working as hard) than do owners (Alchian and Demsetz, 1972).
Agency theory must consider these influences, especially since it may no longer be the
principal that managers need to heed most. This debt to stakeholders is strengthened
with the proliferation of ethics courses in business schools and the government mandate
of ethics programs (Ferrell et al., 2014). Managerial behavior is often influenced by
education and training (Dearborn and Simon, 1958) and institutions will certainly
influence the behaviors and awareness of how executives handle conflicts between
stakeholders. One such (and current) conflict may be between owners, government, and
workers over minimum wage. Perhaps, multiple perspectives would mean an increase in
agency problems as most ethics books and scholars seem to argue that managers should
be more beholden to stakeholders than shareholders (Ferrell et al., 2014). A fundamental
refinement of the theory could allow future exploration of the principal-agent conflict.
In addition, the proliferation of media, whether cable networks, internet websites, or
the aforementioned social media, means that stakeholders have greater power to spread
their messages to either inform or to cause trouble. Today almost any individual with a
grievance could be an aspiring reporter spreading the word instantly via blogs or social
media. Previously local problems, such as an upset worker throwing packages due to
labor grievances, can go viral much more easily (e.g. United Airlines breaks guitars;
Berger, 2013). Thus agents need to pay even greater attention to other stakeholders
perhaps causing more conflict with shareholders. In addition, the wide spread use of
social media may mean even greater influence from shareholder rights groups as they
have greater ability to mobilize. Agency scholars should develop theories to draw
attention to media. Perhaps the increase in media and the dissemination of information
MD may provide principals with better monitoring and enforcement, weakening the influence
54,1 of the agent. Altogether, the recent development of these varying stakeholder groups
poke holes in the logic of agency theory and are in need of greater attention.

Limitations, future research, and conclusion

Our research is not without limitations. For one, we selected major events and people
190 that, through a review of prior research, underpin the times and the theory. While we
believe these events and people to be representative, our identification of them should
not be considered exhaustive. We have attempted to recreate, as best we could, the
thought process and circumstances of previous scholars; we probably have uncovered
only a small patch of a richer tapestry (Gaddis, 2002). Our hope is that in the future,
scholars can gain insights from our work and continue to uncover more sections of the
tapestry to better understand the future of the theory. However, despite these
limitations, we believe that by unpacking some of the underpinnings of agency theory
we have demonstrated why the theory has some difficult boundary conditions to
overcome given the current business landscape.
Further exploration of the boundary conditions of agency theory should provide
scholars with fertile ground for a variety of future research. More specifically, future
research should aim to develop extensions to agency theory that help explain the
boundary conditions we have detailed. If these cannot be explained with agency theory,
scholars should take this opportunity to explore and develop theories that are more
useful given ever-evolving economic conditions. Other topics may be of interest as well
that agency theory appears to neglect. For example, agency theory has a deep concern
with capital, both financial and physical, but it does not study human capital of the
workers. Managers are aware of this issue as both non-compete contracts and stock
options have been used to align interests and protect the firm. However, some
managers also face the problem of honest incompetence in creating such arrangements,
a topic that agency theory has also not weighed in on. These ideas for future as well as
other presented in Table I may be fruitful for advancing the theory.
In conclusion, by examining the underpinnings of agency theory in the context of the
modern business environment, it is clear that due to the influences and timing of its
development, agency theory has a number of boundary conditions that carry strong
implications for the future of the theory. Our hope is not to discourage future researchers
from using agency theory, but rather to spur further and necessary theoretical
development and refinement. By doing so, we will gain a better understanding as to
whether agency theory can be modified for maximum usefulness in todays business
world or if new theories will need to be developed to accomplish this feat.

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Corresponding author
Dr Eric Liguori can be contacted at: eliguori@ut.edu

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