Agency Theory was highlighted in Part 1 of this two-part series, along with personal and organisational agency, but this offers only an economic perspective on how we use agency in governance and management.

Across the fields of economics, psychology, sociology, law, and political science, five distinct agency theories can be identified – each with relevance to nonprofit leaders. The chart below compares their foci and key concerns.

Governance Theories and Models

Agency Theory is just one of several organisational theories used to characterise the style and culture of organisations, including nonprofits.

Other governance models are available with broader relevance to the non-profit sector, including stewardship, servant leadership, and social benefit models. Balanced Scorecards and corporate social responsibility metrics also reflect these more human-centric (less materialistic) approaches. The chart below surveys a further eight such theories, which are sometimes referred to as governance models.

From my observation, many nonprofits use a combination of these models, with various elements of selected approaches being applied according to changing circumstances over time.

Principles and Agency: Principals and Agents

Nonprofit organisations work to a set of principles (defined by the constitution, strategy, policies, and procedures) when employing organisational agency (capabilities) to achieve their mission and goals.

Agency Theory sees nonprofit board directors as agents of their stakeholders, i.e. the principals who define the goals to be served. Constrained and guided by their principles, the board (as principal) delegates certain authorities to the CEO to act as their agent. As noted in Part 1, this principal-agent relationship then usually cascades through a series of subsequent delegations and assignments within the organisational structure.

Agency (vicarious liability) law exists in some form in most jurisdictions, with a common focus on the principal having a duty to supervise their agent’s actions, and to ensure their compliance with specified standards and limitations. Under such laws, the principal is held accountable for any negligence by the agent or employee, as if they had committed the act or omission themselves.

The Agency Problem

The principal-agent model has often been described as problematic because of inherent conflicts of interest between the principal and the agent. ‘Agency cost‘ is the term used by economists to describe the class of issues associated with reliance on the Agency Governance Model. Its emphasis on control mechanisms and financial metrics may be considered inappropriate for most nonprofit and for-purpose cultures. The chart which follows describes this conflict of interest as ‘The Agency Problem’.

Of the nine governance theories mentioned above, two have a particular emphasis on the principal-agent relationship: Agency Theory; and the Servant Leadership Theory.

The header chart above suggests that these two models represent opposite approaches to the principal-agent relationship. In Agency Theory, the leader is principal and the team member is agent. In that role they are held accountable to the leader for their performance. In Servant Leadership, the leader serves the team, seeing their role as nurturing the capacity of the team members to achieve optimal outcomes.

Proxy Agency and Delegation Style

As noted in Part 1, Albert Bandura‘s Agency Model identifies three forms of agency – personal, collective, and proxy. Proxy agents may be appointed by either individuals or groups.

When we appoint proxies to act on our behalf we assign them certain rights and responsibilities. Many different types of agents and activities will come to mind, from legal representatives to talent agents, estate agents, disability advocates, trustees, executors, and so on.

When organisations use proxies, they often employ delegation instruments, contracts, service agreements, and other formal documents. These instruments record the scope of the authority or role in question, and the associated accountability and reporting requirements. To the extent possible, these tools are meant to address the potential for conflicts of interest and to prevent legal, financial, or other adverse consequences. Monitoring and evaluation measures therefore feature prominently amongst the associated risk management controls.

Delegation is the main mechanism used internally (alongside HR documents, policies, and performance plans) to assign proxy responsibilities. It may be described in various ways, including delegation of powers, delegation of responsibility, role delegation, project delegation, task delegation, outsourcing, etc. Governance charters usually contain delegation policy requirements, including a set of matters the board may not delegate, and broad boundaries or constraints the board expects will be applied to financial and staffing delegations.

Instruments of delegation offer a snapshot view of the type of agency and therefore the kind of culture your organisation supports. Where the instruments read more like prescriptions, with long lists of rules, constraints, boundaries, and specific requirements, they may be considered an expression of autocratic control. This kind of instrument may offer little opportunity for intrinsic motivation on behalf of the delegate. Because they can reinforce a lack of trust in that person’s judgment, the delegate may become demotivated, and consequently produce suboptimal outcomes.

When the instrument is expressed more open-endedly as a set of authorities and principles, this leaves it up to the delegate’s judgment as to how they will achieve a set of broadly defined outcomes. They are, therefore, more likely to be encouraged to take personal responsibility and to blend their motivation with the intentions of the delegating person or body to achieve optimal results. Ideally, extrinsic and intrinsic motivations combine to positive effect.

The leader charged with getting the best from their team will be undermined if they are required to micro-manage them. Leaders who see their role as supporting their team to have shared ownership of high-level goals and to give it their best, generally cultivate improved productivity and employee loyalty.

A selection of delegation challenges and solutions is offered in the chart which follows. Responses to conflicts of interest, knowledge gaps, and agency slack are outlined, along with key insights. Most notably, it proposes that effective delegation requires a nuanced understanding of agent motivations and conflicts (perceived, potential, and real). Well-governed organisations will have a conflict of interest policy that defines the ways such conflicts are to be avoided or managed.

Where delegations are poorly framed, and the principal fails to define the scope of the authority being granted and how the delegate needs to keep them apprised of progress, liability issues are likely to ensue.

Serving a worthy purpose

Whatever our role in life, we all have to serve someone or something (cue Bob Dylan’s 1979 song ‘Gotta serve somebody’). The choice is ours.

For some, the preference is to serve themselves rather than others. Self-interest is at the heart of conflict of interest in board governance and professional integrity issues – see the Agency Problem above.

For others, being thought of as a ‘servant’ is demeaning, evoking as it does various forms of slavery or class-based prejudices.

Nonetheless, it is a defining characteristic of nonprofit and for-purpose organisations that they aim to serve a worthy purpose. For some, that purpose is a public benefit that is achieved via their charity or community service. For others, the beneficiaries will be a target group, like members of a profession, club, union, society, or industry. The worthy purpose for both kinds of organisations focuses on stakeholders, not stockholders.

The next chart suggests a selection of altruistic purposes, each of which offers a way to ‘serve’ others.

Echoing the message in Part 1 regarding the benefits of collective agency, for all of us committed to worthy purposes, here’s a quote from cultural anthropologist Margaret Mead:

“Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.”

[As an aside, I recall, as a young policy officer, being reluctant to see our ‘outer budget agency’ become integrated with the public service given the 9.00-5.00 ‘clock watching‘ reputation public servants had at that time. We all thought of ourselves as professionals, for whom long hours and dedication were part of the culture. It was not that we thought we would work any less diligently, but rather that we would be seen differently by our key stakeholders.]

Proxies for public good

Political commentators and sociologists sometimes refer to certain policy initiatives as proxies for a broader social good. See chart below.

A housing project which aims to repurpose empty office buildings for public housing could be characterised as a proxy for reducing homelessness. A health service outreach program might be seen as a proxy for enhanced access rights for underserved communities. Similarly, certain nonprofit strategic initiatives may be seen as proxies for enhancing member or client benefit.

Likewise, the concept of ‘agency’ is sometimes applied to initiatives. For example, we might speak of a social harmony initiative being achieved via the agency of intensive weekend workshops.

Summing up

While Part 1 of this short series promoted the benefits of personal and organisational agency, Part 2 has drawn attention to some of the ways agents, proxies, and servants are governed and managed. Employing a human-centred approach, that is sensitive to agent motivations and conflicts, may be seen as a key success factor for nonprofit leadership.

See also:
Promoting Personal & Organisational Agency – Agency Part 1
Good and Bad Delegation
Identifying with Purpose
Double-edged swords and Paradoxical Choices
Was it something I said? Dialogue Style Choices