The Importance of Agency in ‘The Rise and Fall of Management’

‘The Rise and Fall of Management’ highlights some issues as of particular importance to the current situation. For instance, the universal adoption of agency theory. Agency is a legal relationship where the agent acts on behalf of the principal who is bound by the agent’s actions, and the agent is bound to act, in his or her professional capacity, in the principal’s best interests. So much is not in doubt. Moreover, early examples of this legal relationship related to the commercial world, as in the old overseas trading companies where the ship’s captain acted as the agent of the ship’s owners. That origin too is not questioned.

But ‘The Rise and Fall of Management’ suggests the application of the agency relationship to the management (as agent) and shareholders (as principals) in the modern limited liability, publicly quoted company is absolutely wrong. It is wholly false in denying the existence of the company as a legal entity in its own right. The company is the legally defined principal with which the management have a legal relationship as agents, and are bound to work in the company’s best interests. The shareholders’ relationship with the company is more complex and varied, but they are not the owners of the company itself, as they might be owners of any other item of property, a) because their liability is limited, and b) because what they own are share certificates which is only part of the company’s capital, and c) because the company largely comprises people and, since slavery was abolished, people are not ownable.

The reason why construing shareholders as principals has been so important, is argued in the ‘The Rise and Fall of Management’. It is fundamental to the depletion of Anglo-Saxon industry. In economies where shareholder wealth is a less dominant concept, as in Germany, Japan and China, for example, industry has prospered rather better, to the benefit of the general population.

Yet theoretical economists, who first articulated this misapplication of agency, are puzzled that it should have caused such antagonism in some quarters. For them it opened up a vast new area of academic publication, which is the criterion against which academic quality is currently judged. The impacts in the real world were, and are, of little importance to theoreticians. But they have been devastating nonetheless. It is what has justified the selling out of British industry for the short term gains in shareholder value. And continues to do so.

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