The Italian Law Journal | ItaLJ

3 THE ITALIAN LAW JOURNAL NO. 2 (2017)

Principals vs Principals: The Twilight of the ‘Agency Theory’

by Francesco Denozza and Alessandra Stabilini

In this article, we maintain that the agency theory of the corporation, that has dominated the corporate law debate for the last four decades, offers a trivial and reductive description of the problems of the corporation, ignores the most significant phenomena and offers a distorted picture of issues that the law must solve. As a matter of fact, none of the predictive implications of the agency theory has proved to hold in the real world – widespread malfeasance of corporate executives is one prominent example. On the theoretical side, many of the assumptions on which the theory is based seem fundamentally flawed (one above all, the idea that all shareholders – the principals – share the same interest, which should justify the focus on the principal-agent relationship as the core of the corporation). We propose a radically different view of the corporation, that shifts attention to the principal – the shareholders – themselves. In our view, the point of corporate law is not how to make managers pursue the best interest of the one-dimensioned, profit-maximizing shareholder; the point is how to account for the – clearly existing, and non-ignorable – different interests of the shareholders and how to accommodate them in the objective-function of the corporate firm. In this perspective, other fields of discussion become much more interesting and important than those explored by the agency theory: for example, issues of shareholder (and generally stakeholder) empowerment and representation emerge as important questions in the corporate governance debate.

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