ABSTRACT
The chapter provides a critical analysis of the agency theory of the firm and its influence on corporate governance. It begins by highlighting that agency theory emerged in the context of the debates on corporate law in the USA in the 1960s–1970s to supply academic support to those striving against corporate regulation. It then examines the theoretical building blocks of agency theory, namely its conception of human behaviour and the notions of agency costs and principal-agent relationships. Agency theory defines firms as nexus of contracts. It denies that firms have a collective dimension, which means denying the need for, and exercise of, power within firms. The specificity of the employment contract as enshrined in labour law, namely unequal power and an authority relationship, is expressly discarded. In the agency literature, “authority” is meant to refer to scope of discretion. The authority and subordination phenomena are entirely overlooked. The chapter ends by illustrating the extent to which agency theory and its simplistic theoretical claims succeeded in influencing corporate law and corporate governance practices, with severely detrimental consequences.
