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Introduction
The question of when and how agency theory was formalized is intriguing. The answer could provide a much stronger understanding of the context, limits and practicality of the theory. Accordingly, in this paper, we track the emergence of agency theory across a century of business scholars and business events, showing how the apparent inability of both management practitioners and scholars to address the problem of managerial agency, despite some obvious attempts, encouraged development of this now seminal theory (Berle and Means, 1932; Fama and Jensen, 1983; Jensen and Meckling, 1976). This problem was famously highlighted by Smith (1776) in his seminal work, The Wealth of Nations, which posited how the emergence and increasing prevalence of the joint stock company created a dangerous gulf between owners and managers. More specifically, Smith (1776, pp. 574-575) noted:
The directors of such companies … being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private company frequently watch over their own … Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
In identifying the relationship between owners and managers as a critical and central dynamic of the emerging free enterprise system, Smith understood that agency conflicts threatened negative economic and organizational outcomes. By contrast, modern agency theory posits “principal-agent relationships should reflect efficient organization of information and risk-bearing costs” (Eisenhardt, 1989, p. 59). These differences between Smith’s initial perceptions and recent hypotheses are clearly significant, given agency theory’s prominence not only among strategy and corporate governance scholars but also by scholars in accounting, finance, operations management, information systems and economics (Bahli and Rivard, 2003; Crutchley and Hansen, 1989; Logan, 2000; Noreen, 1988; Ross, 1973). Given modern agency theory consists of a multitude of diverse users, many of whom may possess a general lack of critical historical understanding, understanding of agency theory’s historical context is overdue and much needed.
As scholars seek ways to deepen our understanding of agency theory, an enriched contextual and conceptual history is needed to specify the conditions under which the development of the theory was forged. Such an...