This short article is the result of a research project conducted by UFJF on the Law of Organizations (public and private). It forms the basis for the Migalhas column—“Migalhas de Direito das Organizações”—which I coordinate together with professors from UFJF and other partner institutions.
I begin this reflection with a recurring statement found in texts influenced by Agency Theory when they define the scope of Corporate Law: “The role of the law is to reduce agency costs by ensuring that agents act in the interests of principals rather than in their own personal interest. Law does this by providing for the enforcement of contracts, facilitating contracting through disclosure, and by reducing the cost of contracting through the provision of default rules.”1
What lies behind this line of thinking?
Seeking to answer this question leads us not only to a deep dive into the foundations of agency theory, but also to the historical analogy between corporations and trusts, to the limits of that analogy, to the ongoing debate in Anglo-American law between contractualist and fiduciary law positions, and, ultimately, to research on the theoretical limits of Agency Theory.
Ultimately, how can we understand today the mandatory legal norms that shape the behavior of so-called governance agents? Would economic norms be sufficient to curb selfish and opportunistic behavior?
In our view, research that seeks to investigate both the theoretical and explanatory aspects of agency theory, as well as research that challenges the theory by analyzing the practical effects of its proposals, is necessary. While, on the one hand, over the past few decades the analytical potential of the theory has proven particularly useful for understanding conflicts of interest arising from corporate structure, on the other hand, its limits must be tested. It is through this process that a theory is either replaced or refined.
For this reason, we present a brief thought-provoking question.
Agency theory, as a neoclassical strand of economic thought, conceives of the firm as a mere legal fiction, whose essence lies in the convergence of multiple contractual relationships arising from the factors of production or the market for goods and services. Conceived in this way, the firm is not structured as a hierarchy endowed with command authority, but rather as a contractual structure analogous to the market, devoid of disciplinary authority—a consequence of the principle of the neutrality of the contractual relationship. From this perspective, business management is understood as a continuous process of contractual renegotiation, in which the dissatisfied party retains the right to terminate the established relationship.
The behavioral foundation of this approach rests on the premise that rational economic agents, even if unconsciously, solve problems in their quest to maximize wealth. In light of intense competition and the agents’ adaptive capacity, only the most efficient contractual arrangements survive, according to a logic inspired by natural selection. This assumption is directly linked to the market dynamics formulated by classical economics, as epitomized by Adam Smith’s aphorism, according to which one should not expect dinner from the benevolence of the butcher, the brewer, or the baker, but rather from their self-interest. This abstraction maintains that altruism is not the driving force behind economic relations, but rather self-interest—the foundational element of the division of labor and cooperation through voluntary exchange.
Although neoclassical propositions show a certain continuity with preceding administrative theories—notably regarding the relevance of market forces—they are distinguished by their greater analytical sophistication. To these forces are now added the pricing mechanisms in factor markets, securities markets, and management contract markets. However, by asserting that contracts entered into between market actors are bilateral and voluntary, the hierarchical power once attributed to managers loses its force, since, in a contractual arrangement between equally free parties, both have the right to seek new contractual partners.
This reductionist approach confines the function of corporate law to an almost residual role. Corporate law, in this sense, does not constitute an instrument for legitimizing hierarchical power, but rather a mere contractual component of the capital structure. Based on the premise that only the most efficient models endure, it is assumed that the corporate contract achieves an optimal allocation of risks, rendering any form of state intervention to safeguard shareholders’ interests unnecessary.
This conception aligns with the most extreme formulations of contractualism insofar as it upholds a belief in self-regulation through the price mechanism—which is why it is classified as a strong variant.
Therefore, corporate relationships should be governed by dispositive rules that facilitate the formation or termination of contracts. Mandatory rules should be avoided: economic rules would suffice to resolve any potential conflicts. It is evident that agency theory encompasses both a positive proposal—in the sense of describing reality—and a normative one.
By conceiving contracts as the essence of the corporate structure, the agency paradigm emphasizes the primacy of contractual self-regulation and minimizes the role of the state, transforming corporate law into a mere enabling mechanism composed of dispositive rules. From this perspective, agency theory regards as dispensable the mandatory rules—such as fiduciary duties—designed to curb abuses in corporate management and control, since market forces would be sufficient to compel managers to act in accordance with shareholders’ interests.2
Historically, managers were viewed as fiduciaries, whose obligations served as limits on their discretion. With the advent of the agency theory formulated by Jensen and Meckling, part of the American legal doctrine began to strip trusts of their substance and reduce fiduciary duties to mere contractual provisions. However, such attempts distort the historical and conceptual foundations of fiduciary law. Contracts and fiduciary duties differ profoundly in their origins and scope: contracts derive from common law and are based on the will of the parties, while fiduciary duties emerge from equity and may even run counter to that will.
Furthermore, normative aspects essential to trusts—such as the prohibition on liability-exculpatory clauses—prove irreconcilable with contractual principles, highlighting the inappropriateness of the reductionist assimilation proposed by agency-based approaches.
From another perspective, the corporate structure is analyzed through an analogy with trusts, within the context of Anglo-American law. This comparison is based on legal characteristics shared by both entities: the separation of assets, which prevents the creditors of the members from reaching the corporate assets; the lock-in of capital, which protects the corporation against its own members; the limitation of shareholders’ liability to corporate creditors; autonomous capacity to sue and be sued; and managerial discretion.
Based on historical-comparative research, John Morley concludes that trusts incorporated nearly all the doctrinal characteristics attributed to corporations, being widely accessible to both British subjects and U.S. citizens.3
However, there are arguments that undermine the analogy between trusts and corporations. Although corporate law has incorporated fiduciary principles, there are significant structural differences. Corporate directors manage the company’s assets without owning them and enjoy greater discretion due to the broad scope of corporate purposes, in contrast to the specific objectives of trusts, which are generally stipulated in trust instruments.
Nevertheless, trusts have historically proven effective as an alternative to incorporating companies. During the 19th century, even after the enactment of general incorporation statutes, a large portion of businesses remained structured as trusts. In the United Kingdom, when the first general statute of incorporation was enacted in 1844, the number of trusts exceeded the number of incorporated companies by more than tenfold. Notably, only four of the 882 large companies organized as trusts opted to convert to corporate form, illustrating a resistance to the corporate structure.4
However, this reality did not hold true in the Brazilian legal context, where the trust did not play a similar leading role. This lack of historical and normative parallels raises additional difficulties for drawing an analogy between Brazilian companies and Anglo-American trusts, but does not preclude it.
In closing, we believe that research can yield interesting results when it contextualizes Agency Theory within discussions relevant to the setting of its conception, namely Anglo-American law, by analyzing its framework within the debate between propositions grounded in fiduciary law and those based on contract law, thereby testing not only the foundations of the theoretical framework but also the practical limits of its application in Brazilian law.
Despite the aforementioned convergences and divergences, agency theories ultimately dissolve any link between corporate law and fiduciary obligations.
- MICHELER, Eva. Company law: a real entity theory. Oxford: Oxford University Press, 2021. p. 5.
- HILL, Jennifer G. Hidden fallacies in the agency theory of the corporation. European Corporate Governance Institute-Law Working Paper, 2024, 799.
- MORLEY, John. The Common Law Corporation: The Power of the Trust in Anglo-American Business History. Columbia Law Review, Yale, v. 116, n. 8, 25 jan. 2017.
- MORLEY, John. The Common Law Corporation: The Power of the Trust in Anglo-American Business History. Columbia Law Review, Yale, v. 116, n. 8, 25 jan. 2017.