Redefining Agency Theory to Internalize Environmental Product Externalities. A Tentative Proposal Based on Life-Cycle Thinking

This chapter challenges the shareholder focus of the mainstream use of agency theory, and explores the possibility of redefining agency theory. The aim is to investigate the potential of internalizing environmental externalities of products, although much will be relevant also to social and economic issues. This chapter deals with the corporation, the dominant legal form of doing business, including the development of new products, and of manufacturing and marketing them. Recent research has given us some insight into why corporations in aggregate behave in such an unsustainable way. The reductionist approach of the Chicago School of law-and-economics in this field has served to promote the detrimental social norm of shareholder primacy, where the primary – even the only – goal of corporations is to maximize returns for shareholders. The influence of these ideas and the legal myths they have contributed to creating, of corporations as the property of shareholders and profit maximization as the legal duty of boards, can hardly be overestimated. Agency theory, which in its mainstream version is one of the dominant theories underpinning much of the current understanding of corporate law and corporate governance, has value beyond its current mainstream use. In the current situation, however, agency theory, in the dominant but rather limited and overly shareholder-focused variant, lends support to the social norm of shareholder primacy, which encourages the externalization of environmental and social impacts. Redefining agency theory for corporate law, as a tentative proposal for an analytical tool to find out how to internalize the environmental externalities of products, is a response to these concerns. After the introduction, the chapter explaining the usefulness of agency theory in analysis of corporate law, and then discusses the problematic nature of the mainstream use of agency theory in this context. A tentative proposal for redefining agency theory is presented, before the chapter concludes with reflections on the necessity of such a new approach in the context of the convergence of crises that we face