Agency theory’s incentives may have helped create the self-interested managers it predicted

Evidence

The prominent financial economists Michael Jensen and Stephen Ross played leading roles in the development of agency theory. (See, e.g., Jensen and Meckling 1976; Ross 1973.) The theory posited that agents (in this context, managers) could be relied upon only to pursue their own interests, not those of their principals (the stockholders). The solution was thus to design contracts in such a way that managers would maximize their rewards by doing what was in their principals’ interest. Consultants seized on agency theory in particular on an article in the Haraard Business Review Jensen and Murphy 1990) that called for tighter links between managers’ performance and their rewards and drew from it the lesson that alignment of interests could be achieved by making a larger proportion of managers’ rewards take the form of the stock of the corporations they managed or options to buy that stock (Lowenstein 2004, pp. 13-21). To the extent that rewards geared to stock prices fueled the managerial deceit and wrongdoing of the 1990s and early 2000s, agency theory might be seen as having a perverse performative effect: forms of reward based on the agency-theory presumption that managers would pursue their own self-interest without scruples may have helped to generate a context in which managers did just that. — Donald MacKenzie, An Engine, Not a Camera, 1639

Shareholder valuehasfirstofallbeendescribedasatheoryofcorporateperformance, one that prioritizes the shareholder over other constituents of the firm. The shareholder valueorientationhasbeenlinkedtoprincipal-agency theory,proposed by financial economists like Eugene Fama and Michael Jensen in the late 1970s (Boyer, 2005; Dobbin and Jung, 2010). Agency theory posits that the residual claims of the corporation belong to the shareholder, as the latter has no contractual guarantee of rewards on investment (unlike workers, for instance). Managers, according to agency theorists, face no incentives to maximize the return of shareholders and merely introduce corporate strategies to maximize their own wealth. Thissituation, agency theoristsargue,needstoberemediedbyreunitingownership and control: disciplining corporate managers through shareholder activism on the one hand, while creating a community of interest between managers and owners through the introduction of performance-based executive compensation on the otherhand. — Natascha van der Zwan, Making Sense of Financialization, 45

Categorization

• XREF: Classic performativity example — the theory that assumed opportunistic managers helped produce those managers. Connects to the broader performativity literature (Callon, MacKenzie’s own thesis) and to contemporary critiques of stock-option compensation. — connects to: Public-choice logic applied to economists themselves reveals built-in incentives toward rent-seeking theories. — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 597; Organizational reward structures tie agents’ interests to the organization, not clients
• SEED: Potential essay angle: the mechanisms by which a falsifiable-sounding economic assumption transforms the world to match itself — a concrete case study of performativity’s ‘perverse’ variant.
• DEEPTHINKING: The perverse performative effect — where a negative assumption about human nature becomes self-fulfilling rather than merely descriptive — is the theoretical core MacKenzie is reaching for; dense enough to sit with.
• DEFINE: Concise, canonical statement of agency theory as the intellectual foundation of the shareholder-value orientation.
• corroborated: 3 independent passages support this claim — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1639; Natascha van der Zwan, Making Sense of Financialization, 45

Broader Connections

• Public-choice logic applied to economists themselves reveals built-in incentives toward rent-seeking theories. #exemplifies (0.90) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 597
• Organizational reward structures tie agents’ interests to the organization, not clients #exemplifies (0.85)