Toward An Affect Based View of Principal–Agent Dynamics

Abstract

Following its 40th anniversary and more than three decades after its introduction to the strategic management literature, agency theory remains the predominant theory of corporate governance. In this paper, we examine affect, an underexplored dimension in principal-agent relationships. Using the CEO-board of directors relationship as a context, we develop a theoretical lens that explains how interpersonal affect underlying relationships between CEOs and directors of boards shapes behavior in ways that deviate from traditional agency theory predictions. We discuss how the incorporation of an affective perspective advances principal-agent research by revising agency theory‘s assumptions concerning human nature and behavior and suggesting new research directions. By acknowledging a central role of affect, we connect existing behavioral approaches to organizational agency and advance our understanding of socioemotional foundations of principal-agent tensions, problems, and agency costs.