From formal contracts to psychological contracts: a dual-contract process model of corporate governance

Purpose This conceptual paper explains why legitimate governance arrangements can generate divergent relational consequences even without formal violation. It argues that governance operates through two contractual layers: formal arrangements allocating authority and accountability, and psychological contracts through which actors infer obligations concerning autonomy, candor, fairness and intervention. Design/methodology/approach Drawing on problematization and conceptual integration, the paper combines agency theory with psychological contract theory and insights from relational governance, signaling, trust and justice. It develops a recursive dual-contract process model linking formal architecture and relational signals to promissory interpretation, appraisal, multilevel enactment, repair and governance-system outcomes. Findings The model identifies promissory interpretation as the mechanism through which governance cues acquire psychologically binding force. Alignment can generate fulfillment, trust and relationship maintenance, whereas misalignment becomes breach only through judgments concerning salience, attribution, fairness and prior trust. Even then, a perceived breach does not in itself constitute governance failure. Individual appraisals become collectively consequential only through processes of convergence, framing, coalition formation, power mobilization, and formal enactment, while the resulting responses reshape subsequent governance signals and expectations. Governance-system failure emerges only when recursive deterioration materially impairs oversight, advice, accountability, coordination or credible communication. Practical implications Boards and executives should clarify contingencies surrounding autonomy, monitoring, consultation, information sharing and intervention. Procedural fairness, expectation recalibration and substantive repair can interrupt escalating distrust. Social implications Responsible authority depends not only on formal legitimacy, but also on how governance commitments are communicated, interpreted, recalibrated and repaired. Originality/value The paper offers a mechanism-based, recursive, multilevel explanation of governance maintenance and failure. It extends agency theory by showing that formal mechanisms have interpretive and structural consequences and extends psychological contract theory into a governance context of concentrated authority, multiple contract makers, competing obligations and collective enactment. By distinguishing misalignment from breach, breach from violation and relational deterioration from governance-system failure, the model explains why similar governance actions can stabilize one relationship yet destabilize another.