Corporate Governance & Organization Life Cycle: The Changing Role ...

In the article, a firm is conceptualized as a sum of legal obligations and contractual relationships specified by distinct contracts with several providers that contribute capital and labor.

Alchian and Demsetz (1972) defined a firm as a contractual structure that regulates the relationship between several input owners—team production members—and a “central agent.” This central agent, also called a firm’s owner, can independently negotiate or renegotiate contractual arrangements with any of the input owners. The central agent monitors the productivity of the input owners and holds the residual claim associated with a proper management of the cooperative inputs. The contracts perspective was further elaborated by Jensen and Meckling (1976), who believed that the earlier emphasis on inputs necessary for production was not broad enough. For these authors, contractual relationships are the essence of the firm, not only with specific input suppliers, such as capital or labor, but also with other parties, such as raw material suppliers, creditors, and customers.

Finally, Eisenhardt’s (1989) extensive research provided a comprehensive review of agency theory along with an analysis of its past and potential contributions to the management field. According to Eisenhardt, the first contribution is related to risk implications. Organizations are assumed to have an uncertain future, only partly controlled by their members. In this context, “uncertainty is viewed in terms of risk/reward trade-offs, not just in terms of the inability to preplan. The implication is that outcome uncertainty coupled with differences in willingness to accept risk should influence contracts between principal and agent” (p. 65).

The second contribution to organizational thinking is related to the treatment of information. In agency theory, Eisenhardt said, “information is regarded as a commodity: it has a cost, and it can be purchased” (1989, p. 64). This gives an important role to the information systems that are meant to control agent opportunism. Indeed, one of the tenets of agency theory is that richer information systems help control managerial opportunism and, therefore, lead to less performance-contingent pay. For Eisenhardt, a board becomes a particularly relevant information