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Article

G. Tyge Payne and Oleg V. Petrenko

Agency theory is one the most prominent theoretical perspectives utilized in business and management research. Agency theory argues—using fundamental assumptions that agents are: (a) self-interested, (b) boundedly rational, and (c) different from principals in their goals and risk-taking preferences—that a problem occurs when one party (a principal) employs another (an agent) to make decisions and act in their stead. Essentially, the value of a principal-agent relationship is not optimized because the two contracted parties may have different interests and information is asymmetric (not equal). Agency costs are the result of principal and agent conflicts of interest and disagreements regarding actions that are taken. As such, monitoring and incentive-alignment systems are used to curb costs associated with opportunist behavior. Agency theory is commonly utilized to understand and explain corporate governance phenomena, including executive incentive alignment, board monitoring, and control of top managers; this strand of the literature is founded in economics and represents the bulk of the research in business and management. However, other important principal-agent relationships are commonly seen in business and society, such as with politicians/voters, brokers/investors, and lawyers/clients, and have benefited from the vast stream of research that has explored the principal-agent relationship in various forms and contexts. Also, alternative theoretical perspectives have emerged to accommodate variations of the principal-agent relationship. Namely, principal-principal agency, behavioral agency, and stewardship theories are prominent alternative theories that challenge, expand, or relax the basic assumptions of the classic theory to extend our understanding of important relationships and mechanisms in business and management.

Article

The New Public Management (NPM) is a major and sustained development in the management of public services that is evident in some major countries. Its rise is often linked to broader changes in the underlying political economy, apparent since the 1980s, associated with the rise of the New Right as both a political and an intellectual movement. The NPM reform narrative includes the growth of markets and quasi-markets within public services, empowerment of management, and active performance measurement and management. NPM draws its intellectual inspiration from public choice theory and agency theory. NPM’s impact varies internationally, and not all countries have converged on the NPM model. The United Kingdom is often taken as an extreme case, but New Zealand and Sweden have also been highlighted as “high-impact” NPM states, while the United States has been assessed as a “medium impact” state. There has been a lively debate over whether NPM reforms have had beneficial effects or not. NPM’s claimed advantages include greater value for money and restoring governability to an overextended public sector. Its claimed disadvantages include an excessive concern for efficiency (rather than democratic accountability) and an entrenchment of agency-specific “silo thinking.” Much academic writing on the NPM has been political science based. However, different traditions of management scholarship have also usefully contributed in four distinct areas: (a) assessing and explaining performance levels in public agencies, (b) exploring their strategic management, (c) managing public services professionals, and (d) developing a more critical perspective on the resistance by staff to NPM reforms. While NPM scholarship is now a mature field, further work is needed in three areas to assess: (a) whether public agencies have moved to a post-NPM paradigm or whether NPM principles are still embedded even if dysfunctionally so, (b) the pattern of the international diffusion of NPM reforms and the characterization of the management knowledge system involved, and (c) NPM’s effects on professional staff working in public agencies and whether such staff incorporate, adapt, or resist NPM reforms.

Article

Corporate governance is a central issue in business and economics. However, governance in financial institutions is more complicated than in other fields because of the nature of financial services and instruments. Financial organizations are similar to other businesses in terms of their purposes of establishment, but confidence in management and complex risk structures are more important in financial organizations than in other businesses. In financial institutions, there are various areas in which problems arise that are related to corporate governance, including the agency problem and stakeholder protection. The importance of good governance for sound performance of financial institutions was reconfirmed during the 2008 financial crisis, raising the need to understand the agency problems and the efficiency of various corporate governance mechanisms in mitigating them. International organizations, such as the Organisation for Economic Co-operation and Development, the Basel Committee, the International Finance Corporation, and the International Organization of Securities Commissions, have been working with regulators and policy makers to improve corporate governance practices both in nonfinancial and financial institutions. Corporate governance, especially in financial institutions, is essential in guaranteeing a sound financial system, capital markets, and sustainable economic growth. Governance weaknesses at financial institutions can result in the transmission of problems across the finance sector and the economy. Consequently, the effectiveness of governance mechanisms of financial institutions and capital markets after financial crises had significant importance in a period that witnessed an intensive discussion of corporate governance issues with new regulations and the related academic works.