Convergences and Tensions Between the Agency Theory and Representation in Pension Fund Governance

Abstract

This article compares Agency Theory and the Representation Theory, examining their convergences and tensions, with a special focus on their application to the governance of pension fund firms. Agency Theory, originating in economics, addresses the delegation relationship (principal-agent), focusing on minimizing conflicts of interest, agency costs, and information asymmetry through control mechanisms and incentives aimed at efficiency. On the other hand, the Theory of Representation, originating from political science, analyzes delegation (represented-representative) from the perspective of democratic legitimacy, deliberative participation, and inclusion. The text explores the similarities between the two, such as the delegation of power and the need for accountability, and their crucial divergences, notably the Agency's focus on economic efficiency versus the Representation's on the legitimacy of the process. In the context of pension funds, Agency Theory explains the need for fiduciary controls over managers (agents) to protect participants' (principals') interests. Theory of Representation, on the other hand, underpins structures such as equal representation (of participants and sponsors) in councils, which are seen as essential for legitimacy and the balance of power. The article concludes that theories are not mutually exclusive, but complementary. Effective pension fund governance requires integrating technical discipline and efficiency (Agency) with participatory legitimacy and voice (Representation).