MERITS OF AGENCY THEORY: CASE STUDY

Critically Consider the Merits of Agency Theory as a Guide to Sound Economic Organization: A Case Study

Critically Consider the Merits of Agency Theory as a Guide to Sound Economic Organization: A Case Study

Introduction

As organizations strive to improve their performance through a number of available developmental strategies, all must recognize that there is the possibility of a variety of internal and external elements which may intervene in the process of change and improvement. While different approaches have been used to investigate specific influences which may limit successful organization development efforts, we argue that the principles of agency theory offer significant tools to analyze those elements which may impede the progress desired and interfere with attaining what is in the best interest of the organization.

Agency theory, which has broad roots and application ranging from economics through finance, strategic management, insurance, organizational psychology, and accounting to governmental operations can be applied to organization development processes and problems. We first turn to agency theory in general and then apply it to issues of organization development.

Agency theory and Organization Development

Agency theory was first introduced in information economics as a conceptual model to illustrate the relationship between one party (principal) who delegates work to another party (agent) (Ouchi, 1979; Thompson, 1967). Later on, it was applied as a theoretical model in the fields of compensation, risk, and information systems (Eisenhardt, 1985, 1989). Agency theory focuses on organizational behavior in terms of the relationship between employees as agents of the firms and the managers as principals. Scholars from various fields such as economics (Coase, 1984; Williamson, 1985), finance (Jensen & Meckling, 1976), accounting (Baiman, 1982, 1990), and law (Gilson & Roe, 1992), as well as organizational psychology (Abrahamson & Park, 1994; Eisenhardt, 1989; Nilakant & Rao, 1994), strategic management (Gomez-Mejia, Tosi, & Hinkin, 1987; Hill & Snell, 1989; Hoskisson, Johnson, & Moesel, 1984), and human resource development (Akdere & Azevedo, 2005) have empirically applied this theoretical perspective to analyze management behavior in organizations.

As is true of so many questions about O.D., agency theory focuses on the people within organizations and how they behave. Given its basis in economics, agency theory posits that the actors in an organization are utility maximizers, striving to obtain that which is in their individual best interest and which may not be in the best interest of the organization (Eisenhardt, 1989). With an intellectual heritage linking back to Barnards (1938) work on cooperation in organizations, agency theory is focused on the conflict among goals which may become evident as various individuals perform their jobs within organizations while acting to gain the most for themselves. This approach, however, adds certain new complexities to the picture within the organization.

Defining Organization Development

Organizations, as recursive systems, comprise complex inter-relationships between the elements which make up the system (Coghlan, 1995). As an emerging field of practice, Organization Development (O.D.) has been practiced in organizations across industries to bring change and attain improvement within the organization. The existing literature on ...