Agency Theory, Institutional Sensitivity, and Inductive Reasoning: Towards a Legal Perspective

Making agency theory institutionally sensitive is a reasonable suggestion, as far as normal science stands. However, we argue that such a move has already been taking place, that it cannot address important problems with agency theory, and that the time is ripe for a critical re-examination of this theory. We suggest that inductive studies can not only be more sensitive to institutional features than deductive studies, but they can also offer deeper understanding of governance practices in specific contexts, as well as the potential for analytical or moderatum generalizations. Drawing from legal theory, we offer an alternative conception of the principal, and of the role and status of the board of directors. We contend that this reformulated agency theory has a greater potential of being institutionally sensitive because it recognizes various stakeholders as team members, rather than just adding specific institutional features as variables to the dominant conception of agency theory.