Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • Article
  • Harvard Business Review

The Error at the Heart of Corporate Leadership

By: Joseph L. Bower and Lynn S. Paine
  • Format:Print
ShareBar

Abstract

Agency theory, a new model of governance promulgated by academic economists in the 1970s, is behind the idea that corporate managers should make shareholder value their primary concern and that boards should ensure they do. The theory regards shareholders as owners of the corporation—but raises grave accountability problems: shareholders have no legal duty to protect or serve the companies whose shares they own; they are shielded by the doctrine of limited liability from legal responsibility for those companies’ debts and misdeeds; they may buy and sell shares without restriction and are required to disclose their identities only in certain circumstances; and they tend to be physically and psychologically distant from the companies’ activities. Joseph Bower and Lynn Paine examine the agency-based model’s foundations and flaws and its implications for companies before proposing an alternative model that would have at its core the health of the enterprise rather than near-term returns to its shareholders. Their model would refocus companies’ attention to innovation, strategic renewal, and investment in the future.

Keywords

Agency Theory; Business and Shareholder Relations; Leadership; Corporate Governance

Citation

Bower, Joseph L., and Lynn S. Paine. "The Error at the Heart of Corporate Leadership." Harvard Business Review 95, no. 3 (May–June 2017): 50–60. (Reprinted in HBR’s 10 Must Reads: The Definitive Management Ideas of the Year from Harvard Business Review 2019, Boston, Mass: Harvard Business Review Press, 2019, pp. 165-192.)
  • Find it at Harvard
  • Register to Read

About The Authors

Joseph L. Bower

→More Publications

Lynn S. Paine

General Management
→More Publications

More from the Authors

    • March 2023
    • Faculty Research

    FinTunes, Inc., Board of Directors

    By: Lynn S. Paine and Jennifer Fonstad
    • February 2023
    • Faculty Research

    Peloton Interactive (B)

    By: Suraj Srinivasan, Lynn S. Paine and David Lane
    • January 2023
    • Faculty Research

    Peloton Interactive (A)

    By: Suraj Srinivasan, Lynn S. Paine and David Lane
More from the Authors
  • FinTunes, Inc., Board of Directors By: Lynn S. Paine and Jennifer Fonstad
  • Peloton Interactive (B) By: Suraj Srinivasan, Lynn S. Paine and David Lane
  • Peloton Interactive (A) By: Suraj Srinivasan, Lynn S. Paine and David Lane
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College