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Conflict and Confluence: The Multidimensionality of Opportunism in Principal–Agent Relationships

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Abstract

Conventional agency theory typically focuses on a unidirectional problem, in which an agent behaves opportunistically against the interests of a principal. Yet, this conceptualization is too limited to fully describe all aspects of principal–agent relationships. This article presents a more comprehensive framework explaining a potential three-directional problem—that is, (i) agents behave opportunistically against the interests of principals, (ii) principals behave opportunistically against the interests of agents, and (iii) relationships between agents and principals representing confluence of interests affect the interests of third-party stakeholders. The article provides evidence of these problems, describes their unique characteristics, and outlines implications for society. It concludes with a discussion focusing on the implications of the proposed framework for purported governance solutions, the ongoing debate between shareholder and stakeholder views of the firm, and business practices.

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Notes

  1. Beyond the macrolevel effects, fraudulent activities by executives also have effects at the microlevel. In particular, employees of companies known for fraudulent activities are likely stigmatized for working or having worked for such companies. Zahra et al. (2005, p. 820) argued that “employees of companies that commit management fraud are often hit the hardest,” citing effects such as involuntary turnover and reputation loss that “taints their resume to the point that some employees find it difficult to find alternative employment.” These effects are so common that they have been incorporated into law, and compensation awarded to employees for the loss of reputation for having been associated with “corrupt” and “dishonest” firms has been labeled “stigma damages” (Jefferson 1998).

  2. Note that severance packages and golden parachutes are distinct, in that the latter is conditional on a change in control (i.e., acquisition), while the former is not (Bebchuk et al. 2009).

  3. To further illustrate the overarching proposition, consider the relationship between universities (i.e., principals) and sport coaches (i.e., agents). Coaches develop teams over time, including investment in recruiting and training players who fit with their preferred strategies (Wright et al. 1995), in addition to investing in relationships with assistant coaches and the principal. Many of these investments are university specific and accrue benefits over time. Forced departure of a coach implies loss of university-specific human capital. Hence, as our theory would predict, a governance mechanism has emerged to protect the agent—that is, long-term contracts which require buy-out in the case of termination such that a coach is guaranteed a minimum return on his or her investment.

  4. However, discriminatory tax subsidies may seriously distort investment in favor of the targeted firms against those that are more economically efficient: the ones that rely on their market efficiency compared to those that require government help to compete in the marketplace.

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Acknowledgments

We would like to thank Jay Dial for his valuable input on earlier drafts of this paper. We also gratefully acknowledge the helpful comments and feedback we received from Ricky Griffin, Jeffrey Harrison, and Amy Hillman.

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  1. Department of Management, Texas A&M University, College Station, TX, USA

    Asghar Zardkoohi, Joseph S. Harrison & Mathew A. Josefy

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  1. Asghar Zardkoohi
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Zardkoohi, A., Harrison, J.S. & Josefy, M.A. Conflict and Confluence: The Multidimensionality of Opportunism in Principal–Agent Relationships. J Bus Ethics 146, 405–417 (2017). https://doi.org/10.1007/s10551-015-2887-7

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