The agency theory principal-agent (P-A) corporate governance model introduced by Jensen and Meckling (1976) is considered by many to be synonymous with governance theory. The model assumes that because the ownership structure at publicly traded corporations provides incentives for managers (agents) to act in a self-interested and opportunistic manner, owners (principals) have incentives to invest in formal governance mechanisms. In so doing, the model reduces social relationships within firms to simple dyad relationships between economically rational and motivated actors. In Lubatkin, Lane, Collin, and Very (2004), we argued that the model's undersocialized characterization not only makes it incapable of capturing the complexities of real-world organizations, but also makes it fundamentally incompatible with management theory.
As an alternative, we proposed an embedded governance framework, which we based on two theses. First, we reasoned that whether the managers behaves in a self-serving, opportunistic manner or as a good steward is embedded, or partially determined by the firm's social context, as is the boundedness of the principal's rationality. Accordingly, a firm's governance is in a continual state of adjustment, as managers and owners engage in recursive cycles of individual and shared sensemaking, in the attempt to develop more effective monitoring and incentive mechanisms. Second, we reasoned that the influences on perceptions, attitudes, and behaviors that comes from socialization experiences at the workplace are nested, or embedded within the firm's national institutional context. Taken together, we argued that these two theses suggest that the propensity of managers to behave opportunistically, how they express it, how owners perceive it, and how owners try to govern it, come to represent nationwide preferences for monitoring and rewarding managerial actions that help to distinguish the governance practices of one nation from other nations.
Like all frameworks (and differing from models), however, we noted that our framework can be criticized because its complexity makes it difficult to falsify. We therefore called for others to provide more precise specifications of the included variables and more specific assertions about how those variables interact. Contained in the thoughtful commentaries and critiques by Zahra; Gomez-Mejia and Wiseman; and Ulhoi, are insightful suggestions for meeting our call and advance our framework to be more 'model-like.' That said I suspect that Ulhoi will view these 'advances' as a disturbing step backwards into the epistemological world where, paraphrasing his wording, positivists skeletons roam and draw life from those who unwittingly strike Faustian bargains with the scientific ideals of orthodox economic theory.