Innovative Enterprise Solves the Agency Problem: The Theory of the Firm, Financial Flows, and Economic Performance

By William Lazonick ♦ Since the late 1980s, the dominant ideology of corporate governance in the United States has been that, for the sake of superior economic performance, companies should “maximize shareholder value” (MSV). As promulgated by agency theorists, however, MSV is an ideology of value extraction that lacks a theory of value creation. As a theory of value creation, I have constructed “The Theory of Innovative Enterprise”—an analytical framework for understanding how a business enterprise can generate a good or service that is of higher quality and lower cost than products previously available. In this essay, I use innovation theory to provide both a general theoretical critique and a selective empirical critique of agency theory.