Agency Problems and the Theory of the Firm

The article attempts to review the separation of the ownership and control functions such as managerial tools and risk management in terms of the competition`s influence from other firms which forces the evolution of devices for efficiently monitoring the performance of the entire team and of its individual members, in order to understand that we define “Management role” as “Decision making” and “The entrepreneur” as “risk bearers “, in that context there is irrelevance of the concept of ownership of the firm, in other words the entrepreneurs are sharing in a part of wealth as security holders, and this part is used to purchase capital and technology.

That entrepreneur in the article is the central agent who is also can called “the firm’s owner, managers and the employer “, furthermore the top management are disciplined by the designed function “Board of directors” who has role to provide relatively low-cost mechanism for replacing or reordering the top managers, thus the managers have a strong interest in the existence of a capital market which efficiently prices the firm’s securities.

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The manager’s wage tracks the expected value of his marginal product, He will agree to some amount of ex post settling up, but always less than 100 percent of the deviation of his measured marginal product from its ex ante expected value. In short, the contracting models suggest that we must learn to live with the incentive problems that arise when there is less than complete ex post enforcement of contracts.

Thus the manager can avoid any risk discount in his wage, and maintain complete freedom to switch among firms, by himself bearing all the risk of his marginal product.

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At last the article proves the importance of the separation of security ownership and control which is typical of large corporations and efficient form of economic organization.

Insight of Corporate Governance Theories

Wan Fauziah Wan Yusoff1* and Idris Adamu Alhaji1
-The paper reviews the literature on the verity of theories in corporate governance which refers to the private and public institutions, including laws, regulations and accepted business practices, which together govern the relationship, in a market economy, between corporate managers and entrepreneurs (corporate insider) on one hand, and those who invest resources in corporations on the other hand (OECD, 2001, p 13)

  1. Agency theory: Agency problem is on how to induce the agent to act in the best interests of the principle, in this context, agents are the managers, principles are the owners and the board of directors’ act as the monitoring mechanism (Mallin, 2004).
  2. Stakeholders theory: The firm has a fiduciary duty to maximize their returns and put their need first, in more recent business models the institutions converts the inputs of investors, employees, and suppliers into forms that are saleable to customers, hence returns back to its shareholders.
  3. Resource dependency theory: In this perspective, directors serve to connect the firm with external factors by co-opting the resources needed to survive (Pfeffer & Salancik, 1978).
  4. Stewardship theory is in contrast to agency theory, stewardship theory presents a different model of management, where managers are considered good stewards who will act in the best interest of the owners (Donaldson & Davis 1991). Stewardship theory sees a strong relationship between managers and the success of the firm. Therefore, it takes a more relaxed view of the separation of the role of chairman and CEO, and supports appointment of a single person for the position of chairman and CEO and a majority of specialist executive directors rather than non-executive directors (Clarke 2004).
  5. Social contract theory sees society as a series of social contracts between members of society and society itself (Gray, Owen & Adams 1996)
  6. Legitimacy theory is based upon the notion that there is a social contract between the society and an organisation.
  7. Political theory highlights the allocation of corporate power, profits and privileges are determined via the governments’ favor.

Shareholding Versus Stakeholding: a critical review of corporate governance

Steve Letza*, Xiuping Sun and James Kirkbride

This paper serves a survey and critical review of both the shareholder and stakeholder perspectives on corporate governance and how to solve inherent problems in this territory. The aim from this paper is to make some remarks on the limitations of current approaches, particularly the conventional modes of thought on analysing corporate governance issues and call for a new way of thinking.

In essence, there are four major views of corporate governance models: Finance (Principle-agent) model, Stakeholders model, Stewardship model, and the political model, Finance model is basically putting the maximizing of shareholders’ interests in the focus, hence compatibility with short-term market value, because of the immediate pressure or interest from hostile takeover, and the solution for improving corporate governance is to provide an environment in which shareholders (particularly large and/or institutional shareholders) e.g.
styles of capitalism, one is the Anglo-American style

In contrast, stakeholders’ model is about the maximizing of stakeholder’s wealth, not only compatibility with long-term market investments but also providing Social efficiency of an economy e.g. the continental European-Asian style.
Similarly, the contrasting in corporate governance about those two perspectives can be divided into major theories about Inherent property rights theory (Fiction theory) and Social entity theory (Organic theory).

Indeed, corporate governance is not science, but an art (Allen, 2001: 2), and both the shareholding and stockholding perspectives attempt to generalize and simplify their theories, even though corporate governance practice is very dynamic and complex, thus the most popular approach in corporate governance research is economic analysis. This is manifested in both the shareholder model and the stakeholder model.

Corporate governance in China: A modern perspective.

Fuxiu Jiang 1, Kenneth A. Kim

The paper has two primary purposes: Firstly, to provide a current overview of corporate governance in China and secondly to point out and discuss corporate governance features that are, in large part, unique to China.

There are two capital markets in China: Shenzhen Stock Exchange and Shanghai Exchange. In our paper, the regular domestic stock shares in China are known as A-shares, a small fraction of listed firms also known as B-shares which are denominated in foreign currency and were originally restricted to foreign investors. The total market capitalization of B-shares is less than 0.5% of the total market capitalization on the two stock exchanges. Cross-listed shares are known as H-shares (if listed in Hong Kong), N-shares (New York), S-shares (Singapore), and L-shares (London).

The China Securities Regulatory Commission (CSRC) is responsible for approving initial public offerings (IPOs), Simply to make sure that the issuers are following the roles, However, the reality is that the CSRC still tightly controls the IPO process, as the CSRC has the final say.

Investor composition in China has changed dramatically, especially in recent years and because individual investors in China are, for the most part uninformed speculators, the Chinese government has increasingly promoted the presence and growth of institutional investors, hoping that they will bring stability, activism, and oversight to the stock markets. Many securities regulations are, of course, imposed by the CSRC and by China’s two stock exchanges, and many company laws are imposed by the government.

In China, firms also have supervisory boards. Such two-tier board structures (i.e., a board of directors and a board of supervisors) Thus, the primary responsibilities of supervisors are to supervise and evaluate directors and senior managers, however we define also the State-Owned Assets Supervision and Administration Commission (SASAC) as the entity that represents the state as the largest shareholder of SOEs.

The ownership structure of listed firms in China is a high concentration of ownership in order to be monitored by one or more of their large shareholders, similar to the United States and other developed economies. The median level of inside ownership for non-SOEs is very low, indicating that the distribution of managerial ownership is skewed.

That is, the occurrences of significant managerial-ownership among non-SOE listed firms are few, furthermore institutional investors are neither large shareholders at the firm-level, nor do they have long-run horizons. Firms recently are engaging in CSR activities to build political connections considering that CSR can enhance the firm`s value.

Convergence of Corporate Governance: Critical Review and Future Directions Toru Yoshikawa* and Abdul A. Rasheed
The paper reviews the argument between the normative consensus which is inducing corporate law and practice to converge towards the shareholder`s value maximization model and the suggestion about increasing the globalization to make the economic institutions adapt foreign practices to fit its local institutional contexts which probably can lead to hybridization.

Convergence in form relates to increasing similarity in terms of legal framework and institutions. Convergence in function suggests that different countries may have different rules and institutions but may still be able to perform the same function such as ensuring fair disclosure or accountability by managers, hence in any examination, it is important to be clear about what kind of convergence that we are discussing about.

Foreign issuers entering the financial markets have to incur significant regulatory and compliance costs, signalling to investors that they are willing to comply with higher standards than required in their home country (Vaaler & Schrage ,2006) Thus, foreign listing, through either cross-listing or IPOs, although motivated by the desire to increase firm valuation, results in convergence as a by-product.

But in order to attract foreign investors, it becomes necessary to comply with their expectations of good governance in matters such as disclosure and respect of the rights of minority shareholders. Thus, the key is not only to attract foreign investors but also to retain them. Similarly, the product market integration and the resulting global competition have the same effect on governance systems (Khanna & Palepu, 2004).

Integration in the global economy functions as a transmission belt for the need to innovate and facilitate the transfer of practices across countries (Aguilera &Cuervo. 2004: 424). Considering that from the perspective of institutional complementarity, the effectiveness of individual governance practices cannot be evaluated in isolation. However, the evolutionary trajectory of the governance system of a country is the result of thousands of individual historical events and policy responses to them, and property rights institutions in each country are the principal source of diversity among national governance systems.

All things considered, we can conclude that the development of a consensus about a normative ideal form of corporate governance is not possible when there is not even a consensus on the purpose of the corporation. Further, in many cases, convergence seems to be more a matter of form than substance and only the time will judge what processes that facilitate, slow down, or even prevent corporate governance convergence.

Society and legal change

Alan Watson

The material content of a legal system has always been seen to reflect in some sense the needs or demands of societies, it is `the spirit of the people` who living and working in all the individuals together, thus law could not be `the spirit of the people` unless it accurately reflected the needs and desires of the people.

The purpose of the book is to attempt an account of the general course of development of law from its beginnings until maturity. Thus, the practical measure of values which the law has been using where theories have failed is simply to secure as much as possible of the scheme of interests as a whole as may be with the least friction and waste; to secure as much of the whole inventory of interests as may be with the least impairment of the inventory as a whole.

No matter what theories of the end of law have prevailed, this is what the legal order has been doing. However, for others law has been representing the interest of the ruling classes, in other words, it is an expression whose content is always determined by the relation of these classes.

With this in mind the law can be considered as `Non sequitur `unless it reflects the needs and desires of society or its ruling class, likewise the concept of `Time-lag has only a real meaning when society changes the legal rules as a response to the factors that require changes to create a new look of the society.

Often, indeed, the rules of law are in conflict with the best interests and desires both of the ordinary citizens and the ruling elite, hence the aim of the present book is to show that the relationship between rules of private law and society is much less close and inevitable than is envisaged by legal theorists. therefore, I claim that legal rules are often out of step with the needs or desires of society.

Considering that it might also be argued that law is an institution of its society, exists in society, is part of society, hence cannot be said to be out of step with its society, and in order to avoid being exposed to that argument I would in general use the word ‘society’ as a shorthand way of describing the people inhabiting a particular territory, or the Citizens of a particular state.


Filatotchev, I., Jackson, G. & Nakajima, C

The paper outlines an emergent stream of research about illustrating how performance effects of corporate boards, ownership concentration, and executive incentives may differ according to the legal system and institutional characteristics in a specific country.
We highlight two issues relevant to cross-national comparisons regarding the agency theory.

Firstly, the argument that agency theory is `under socialized `approach which restricted its attention to mostly two actors (shareholders and managers), rather than shaping the identities and interests of a wider set of stakeholders, and secondly that the notion of effectiveness within agency theory is too narrow to be applied to corporate governance in very different settings. thus, the alternative `open-system `approach suggests that corporate governance practices are interdependent with the diversity, fluctuations, and uncertainties of their environment, and rejects universalistic ‘context-free’ propositions (Aguilera et al., 2008), in addition to shifting the focus of corporate governance research toward a more holistic context of wealth creation and protection, rather than only agency costs.

The institutional theory emphasizes the regulatory framework in a country as an important element of national institutional systems. By looking specifically beyond a universal “manager-shareholder” dichotomy, the examples from many countries show that the basic principal-agent problem is always embedded within legal institutions that construct and legitimate the relationship between shareholders, the board, and the wider interests of the company in different ways. Consequently, what agency theory takes for granted in terms of shareholder rights may be difficult to exercise in practice.

The primary agency problem in the institutional context is about the expropriation of minority shareholders by the blockholders (La Porta et al., 2000; Shleifer & Vishny, 1997). whereas the comparative institutional perspective helps to resolve this contradictory by suggesting that whether or not concentrated ownership promotes effective corporate governance which may depend on the presence or absence of various types of national institutions.

Furthermore, institutional analysis extends the traditional agency framework further by suggesting that the effectiveness of executive compensation is shaped by a complex set of institutional factors that tend to differ across countries.

At last the integration of institutional theory and corporate governance studies requires new research methodologies to provide a more realistic and policy-relevant understanding about what makes corporate governance effective.


Julia Black

The paper attempts to answer three basic analytical questions: what is ‘decentring regulation’, what is ‘self-regulation’ and how does it fit in the decentring analysis, and what meaning is given to ‘regulation’ to allow it analytically to be ‘decentred’- how do we know ‘decentred regulation’ when we see it? As many have noted, ‘command and control’ (CAC)is more a caricature than an accurate description of the operation of any particular regulatory system.

The decentred understanding of regulation is based on slightly different diagnoses of regulatory failure, diagnoses which are based on firstly the complexity that refers both to causal complexity, and to the complexity of interactions between actors in society, Secondly the fragmentation, and construction, of knowledge.

This is sometimes referred to simply as the information asymmetry between a regulator and regulated, Thirdly the fragmentation of the exercise of power and control. This is the recognition that government does not have a monopoly on the exercise of power and control, rather that is fragmented between social actors and between actors and the state.

Fourthly a recognition of the autonomy of social actors. Autonomy is not used in the sense of freedom from interference by government, but in the sense that actors will continue to develop or act in their own way in the absence of intervention, Fifthly the existence and complexity of interactions and interdependencies between social actors, and between social actors and government in the process of regulation.

The decentring analysis reveals not only to open up the conduct of the conduct but also emphasizes the de-apexing of the state: the move from a hierarchical relationship of state-society to a heterarchical one. That shift from hierarchies to heterarchies implies a different role for the state, one of mediator, facilitator, enabler, and for the skills of diplomats rather than bureaucrats.

Furthermore, the decentring analysis is also significant for our understanding of the law, and perhaps law’s understanding of itself. thus, the question is not whether the law can survive without hierarchy but rather how the law can learn to understand itself in a world of horizontally rather than hierarchically configured relations.

The globalization of law has decentred law-making from nation states to various sectors of society Its source is civil society, but it is not in the ‘warm communal bonds’ of rural or traditional communities but in the ‘cold technical processes’ of global specialist networks. Thus decentring, and not just by globalization, raises the issue of the development of a theory of legal pluralism, and of the nature of the relationship between regulation and law.

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Agency Problems and the Theory of the Firm. (2020, Jun 02). Retrieved from

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