The Death Knell of the Agency Theory

Business Sustainability

Dr. Andrew Hoffman, Holcim Professor of Sustainable Enterprise at the University of Michigan’s Ross School of Business and School of Environment and Sustainability, recently published an article in the Stanford Social Innovation Review titled, “The Next Phase of Business Sustainability”. The piece is an excellent overview of the ways in which sustainable business practice is evolving and getting closer to producing authentic triple bottom line value. Dr. Hoffman covers a number of ways in which this evolution is manifesting itself, one of which is the long awaited repudiation of Friedman’s agency theory and the notion that businesses exist to “maximize shareholder value”.

The agency theory is a favorite of mine. I am fascinated by how it has become so imbedded into our culture, so much so that many of us are completely unaware of it. I believe it defines the cave in which we dwell.

Friedman’s ideas – which came directly from his head and had no basis in reality – were originally published in a 1970 New York Times article, and because they gave license to globalization, corporate management immediately gobbled them up. By combining Friedman’s agency theory with Ron Reagan’s, “Government is the Problem” administration of the late seventies, we have the genesis of the neo-liberal mess we have today. This singular notion of humanity’s being motivated by money alone is leading to the destruction of our social fabric – the common good – and the planet itself.

Business, or commerce and trade, have been with humanity since before recorded history. To suggest businesses exists to simply put money in the pockets of owners flies in the face of thousands of years of human history.

Businesses exist to lift-up the common good. Business and the market are the means by which we cooperate with each other and make the world a better place. As Dr. Hoffman points-out, it is far too cynical to suggest human beings are governed solely by selfish inclinations. How does one explain heroic behavior? How do we makes sense of the business leader who foregoes his salary to keep from having to lay-off employees?

Unfortunately, the formation of our business leaders and the practice of business itself, has undergone a tragic shift in the past fifty years: It has modeled itself on the worst elements of human behavior. It’s time we moved-on, and as Dr. Hoffman suggests, recognize that human behavior is far too complex to be defined by greed alone. It is essential that we see past this shallow view and look to the transcendental nature of Earth and its history. If we do not, we risk destroying the very thing that gives us life.

The SMSBF invites you to take part in the transformation of business and join us for “The Triple Bottom Line Forum: Business for the 21st Century”.  The event is being held on Thursday, June 28th in the Student Center of Wayne State University. To learn more and register, click here.

Mike ShesterkinMichael Shesterkin, General Manager, What’s Next, LLC

A coaching and consulting practice that works with businesses and business leaders to realize their full potential and create sustainable, triple bottom line – people, planet and profit – value. Using proven models of continual improvement, Mike works with business leaders and their teams to develop strategies and implement action plans that build social capital, reduce negative environmental impact, and grow profitability.

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