The principal–agent problem and its mitigation: a critical historical analysis

Abstract

Purpose The purpose of this paper is to provide a critical historical analysis of the business (mis)behaviors and influencing factors that discourage enduring cooperation between principals and agents, to introduce strategies that embrace the social values, economic motivation and institutional designs historically adopted to curtail dishonest acts in international business and to inform an improved principal–agent theory that reflects principal–agent reciprocity as shaped by social, political, cultural, economic, strategic and ideological forces Design/methodology/approach The critical historical research method is used to analyze Chinese compradors and the foreign companies they served in pre-1949 China. Findings Business practitioners can extend orthodox principal–agent theory by scrutinizing the complex interactions between local agents and foreign companies. Instead of agents pursuing their economic interests exclusively, as posited by principal–agent theory, they also may pursue principal-shared interests (as suggested by stewardship theory) because of social norms and cultural values that can affect business-related choices and the social bonds built between principals and agents. Research limitations/implications The behaviors of compradors and foreign companies in pre-1949 China suggest international business practices for shaping social bonds between principals and agents and foreign principals’ creative efforts to enhance shared interests with local agents. Practical implications Understanding principal–agent theory’s limitations can help international management scholars and practitioners mitigate transaction partners’ dishonest acts. Originality/value A critical historical analysis of intermediary businesspeople’s (mis)behavior in pre-1949 (1840–1949) China can inform the generalizability of principal–agent theory and contemporary business strategies for minimizing agents’ dishonest acts.