Paper 08
The Fluidity of Agency Theory between the CEO and the Board of Directors
A reading brief on whether ultra-high-powered CEOs can invert the traditional principal–agent relationship and turn their own boards into agents.
- Status
- Class Reflection
- Date
- Oct 15, 2025
- Reading
- 3 min
Abstract
Agency theory assumes the board is the principal and the CEO the agent. Tesla's compensation saga and Musk's platform reach suggest that, at the extreme, that relationship can flip, with implications for how boards govern transformative innovation.
00 / Listen
Audio companion to this paper.
00 / Paper
When the agent becomes the principal.
For companies embarking on transformative digital innovation goals, it is important that either their CEO is high-powered or their board of directors demonstrates strong social capital (Eisenhardt, 1989). High-powered CEOs are less risk-averse, which often translates into greater funding for R&D projects, initiatives that are typically difficult to evaluate in the short term (Eisenhardt, 1989). But is the dynamic of agency theory between the CEO and the board of directors fluid? According to Choi and Pang (2023), the board behaves as the principal, while the CEO behaves as the agent, a relationship that exists because the CEO's compensation is determined by the board. However, when examining Tesla's board dynamics, I argue that ultra-high-powered CEOs can alter the traditional agency theory dynamic, causing the board to act as the agent.
In 2024, a judge ruled that a compensation package paid to Elon Musk, Tesla's CEO, by Tesla's board of directors was not fairly representative of shareholder interests. The court found that the board set Musk's goals intentionally low to justify excessive CEO compensation (Hals, 2025). This power dynamic provides an example of the board not acting as the principal under agency theory, suggesting that Musk exerts ultimate control over his board of directors. Further exploration would be needed to determine whether Tesla's board consists of high-powered members or those with high social capital, in order to understand how these dynamics relate to (Eisenhardt, 1989; Hals, 2025).
As of October 2025, Tesla shareholders are preparing a vote regarding Musk's pay as he seeks to become the world's first trillionaire (Vella, 2025). Given that Musk remains the most-followed individual on X, with 227 million followers, nearly twice that of Barack Obama, it's worth exploring at what point a CEO can reverse roles and become the principal actor within a corporate agency theory framework (Chillingworth, 2025).
01 / Why I explored this
A class reading brief connecting Eisenhardt's agency theory to a live governance case at Tesla, staying close to coursework while testing whether the framework still holds at the extremes.
02 / The question I was wrestling with
Can an ultra-high-powered CEO invert agency theory and become the principal over their own board?
03 / Key insights
- 01
Eisenhardt (1989) frames high-powered CEOs and high-social-capital boards as alternative routes to funding hard-to-evaluate digital innovation.
- 02
The traditional principal/agent relationship can flip when CEO power and personal brand eclipse the board's incentive authority.
- 03
The 2024 Delaware ruling on Musk's $56B package is concrete evidence of a board acting as agent, setting low bars to justify outsized CEO pay.
- 04
Platform reach (227M followers on X) is becoming a new vector of CEO power that classical agency theory doesn't yet account for.
06 / Citations
5 citations▸
- Chillingworth (2025)
Chillingworth, A. (2025, October 7). Who has the most followers on X/Twitter in 2025? Epidemic Sound.link
- Choi & Pang (2023)
Choi, I., & Pang, M.-S. (2023). Do CEOs matter? Divergent impact of CEO power on digital and non-digital innovation. Working paper.
- Eisenhardt (1989)
Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14(1), 57–74.
- Hals (2024)
Hals, T. (2024, January 30). Judge voids Elon Musk's 'unfathomable' $56 billion Tesla pay package. Reuters.link
- Vella (2025)
Vella, L. (2025, October 9). Battle over Elon Musk's trillionaire pay package builds as pension funds face off against Tesla. Fortune.link
08 / Future questions
- — What board composition signals, independence, tenure, social capital, actually preserve the principal role against a celebrity CEO?
- — At what threshold of platform reach or personal brand does a CEO functionally reverse agency roles, and how should governance respond?
End of paper 08