A Behavioral Theory of Corporate Governance: Explicating the Mechanisms of Socially Situated and Socially Constituted Agency

Abstract

We propose a behavioral theory of corporate governance based on an ontological foundation of socially situated and socially constituted agency. More specifically, we advance a multi-level, mechanism-based, theory of governance that is socially informed yet actor-centric, and thus offers a distinct alternative to under-socialized governance theories, such as agency theory. We highlight the contributions of recent governance research in providing the foundation for such a behavioral theory, with particular emphasis on our prior work that demonstrated the relevance of social structural relationships, institutional processes, and social cognition. We conclude with a discussion of the central themes that emerge from our perspective.

Notes

Strictly speaking, the notion of “self-interest” does not exclude agents having broader social motives, but conventional applications of agency theory in corporate governance assume that individuals are motivated primarily by their own financial or material gain.

Some of the research described in the prior section aggregated dyadic relationships to the group or “egonetwork” level (e.g. averaging demographic similarity across CEO–director dyads for a given board [Westphal & Zajac, 1995]), but these studies generally did not develop theory about group-level processes.

An exception is Greve, Palmer, and Pozner's (2010) insightful essay on the causes, processes, and consequences of organizational misconduct.