The Uses and Abuses of Agency Theory in Business Ethics
The spectacular corporate scandals and bankruptcies of the past decade have served as a
powerful reminder of the risks that are involved in the ownership of enterprise. Unlike other patrons of
the firm, owners are residual claimants on its earnings.1 As a result, they have no explicit contract to
protect their interests, but rely instead upon formal control of the decision-making apparatus of the firm
in order to ensure that their interests are properly respected by managers. In a standard business
corporation, it is the shareholders who stand in this relationship to the firm. Yet as the recent wave of
corporate scandals has demonstrated once again, it can be extraordinarily difficult for shareholders to
exercise effective control of management, or more generally, for the firm to achieve the appropriate
alignment of interests between managers and owners. After all, it is shareholders who were the ones
most hurt by the scandals at Enron, Tyco, Worldcom, Parmalat, Hollinger, and elsewhere. For every
employee at Enron who lost a job, shareholders lost at least US$4 million.2 Furthermore, employees
escaped with their human capital largely intact. Creditors and suppliers continue to pick over the bones
of the corporation (which still exists, under Chapter 11 bankruptcy protection, and continues to
liquidate assets in order to pay off its debts).3 But as far as shareholders are concerned, their
investments have simply evaporated, beyond any realistic hope of retrieval. (In fact, one of the reasons
that Enron’s collapse was particularly damaging to its employees was that so many of them were also
shareholders, through the company ESOP and their 401k plans.)
The sort of managerial attitude toward investors that proved so damaging in these scandals was
best illustrated by an internal memo written by Hollinger International CEO Conrad Black, who
1 See Henry Hansmann, The Ownership of Enterprise...