Redefining agency theory to internalize environmental product externalities: A tentative proposal based on life cycle thinking

© Cambridge University Press 2018. Introduction: This chapter challenges the shareholder focus of the mainstream use of agency theory, and explores the possibility of redefining agency theory. The aim is to investigate the potential of internalizing environmental externalities of products. Economists define externalities as the external costs of an exchange in a market. External costs related to a product exist when the product creates negative environmental consequences, when produced, transported, in use or when it is disposed of, which neither the manufacturer, nor the seller, nor the user is required or feels obligated to take into account. Such a situation leads to over-production and over-‘consumption’, as well as unrestricted disposal of these products, with grave environmental effects that would not have taken place if these consequences had been internalized somewhere along the global value chain or life cycle of the product. I use internalizing in the strong sense here, meaning that the environmental consequences are integrated along the whole life cycle of the product - from the design and to the recycling or disposal of the product. Internalization in the strong sense entails that products are designed, produced, transported, used, recycled, and/or disposed of in a way that the negative environmental consequences are mitigated as much as possible. The life cycle thinking the aim of internalization in the strong sense requires, is reflected in the Circular Economy Package of the EU, and is in contrast to the linear business model on which our economy has been based. It is also in contrast to the fragmentation of the product life cycle into the smaller spheres of responsibility of the numerous individual businesses that typically populate global value chains. Indeed, finding out how to internalize environmental, social, and economic impacts of corporate activity is one of the most pressing and pervasive issues of our time. This chapter concentrates on the environmental externalities (although much will be relevant also to social and economic issues). In spite of all the business initiatives using a sustainability language, status quo remains very much unchanged: ‘business as usual’ continues, and is a very certain path towards a very uncertain future.