Shareholder Logic Complexity and Agency Theory

Abstract

Heterogeneity of shareholder purposes challenges the standard agency theory, which has overlooked the diverse social contexts shaping shareholder logics. Considering social constitution into bounded rationality of shareholders, we develop a multi-level theoretical framework to understand inherent conflicts across heterogeneous shareholder logics. Shareholder logics may be acquired or developed in response to the external institutional logics in a source field with which shareholders are embedded. The degree of inherent conflicts between coexisting shareholder logics in an investee, which we term shareholder logic complexity, may depend on the centralization and economic commensurability of institutional logics in a shareholder logic’s source field, power structure inside the organization of a shareholder and the board of directors of the investee, as well as identification across levels (field, shareholder as an organization, and the board of directors of the investee). Finally, the optimal agency governance between outcome- and behavior-based mechanisms depends on the degree and the focus (goals or means) of shareholder logic complexity. Our augmented agency theory incorporating socially constituted shareholders offers new theoretical implications on some fundamental premises in corporate governance, including corporate objectives, classification of shareholder identities, and agency problems.