Can an Agency Role-Reversal Lead to an Organizational Collapse?; A Study Proposal

TL;DR

This paper explores how a role reversal between the Board of Directors and the CEO can lead to organizational failure, challenging traditional governance models and highlighting warning signs for governance breakdowns.

Contribution

It proposes a framework to analyze Board-CEO relationships and the impact of role reversal on governance effectiveness, addressing gaps in existing Principal-Agent Theory applications.

Findings

Role reversal can undermine governance structures

Board behavior influences organizational stability

Framework helps identify red flags for governance failure

Abstract

The Principal-Agent Theory model is widely used to explain governance role where there is a separation of ownership and control, as it defines clear boundaries between governance and executives. However, examination of recent corporate failure reveals the concerning contribution of the Board of Directors to such failures and calls into question governance effectiveness in the presence of a powerful and charismatic CEO. This study proposes a framework for analyzing the relationship between the Board of Directors and the CEO, and how certain relationships affect the power structure and behavior of the Board, which leads to a role reversal in the Principal-Agent Theory, as the Board assumes the role of the CEO's agent. This study's results may help create a red flag for a board and leader's behavior that may result in governance failure.