The Limits and Logic of Agency Theory in Company Law

Agency theory is ubiquitous in company law. This book explores (a) the limits of such deployment, and (b) the logic of how to deploy it. It makes five linked arguments in respect of the limits of agency theory in company law. First, it argues that agency theory can be used to analyse most human relationships. Such breadth, though, comes at the expense of legal clarity: as agency relationships cover such a broad range of relationships, there are no normative legal conclusions that can be drawn from identifying such a relationship. Second, it argues that we need to differentiate more specific concepts with clearer legal implications, such as moral hazard and externalities. Third, it argues that large amounts of existing company law theory which is ostensibly built from agency theory, is in fact based on a series of hidden value judgments at each stage of the analysis. Fourth, it argues that company law theory should use agency theory less to rebalance the discipline: agency theory has become hegemonic which is dangerous for the discipline, it obscures company law’s role in establishing incentives, it undermines accountability, and reduces company law’s autonomy. The book then moves to the logic of agency theory, and makes three arguments. First, it argues that we need to factor in the company, only apply agency theory to voluntary interactions, and foreground our value judgments when identifying agency relations to do it properly. Second, it argues that it is rational to incur agency costs where we perceive the benefit of doing so outweighs such costs, meaning that agency costs are facilitative and we should look to front-end them rather than universally minimise them. Third, it argues that this needs to be undertaken through mandatory laws