Agency theory. In addition to the resource scarcity view, dynamics of franchised outlets has been examined from an agency-theoretic perspective as well. Many franchisor- franchisee relationships can be characterised as agency relationships. Such relationships tend to be maintained as long as each partner‟s benefits exceed its costs. Agency theory can be defined as “an agency relationship exists in any joint effort in which one party (the principal) delegates the authority to as a second (agent)‖ (Xxxxxxx, 2007, p908). From the perspective of agency theory, the franchise agreement is designed to maximize the relational qualities of exchange, and the contract clauses are the means to ensure unity (Xxxxxxxxx and Xxxxx, 1999). In franchising relations, franchisors act as principals, giving some resources and authority to franchisees (Xxxxxxx, 2007). (Croonen, 2007, p18) Xxxxxx and Xxxxxxxxxx (1991) point out the following agency problems in franchise relationships: inefficient investment, free-riding and quasi-rent appropriation. Inefficient investment results from the fact that franchisees have a large proportion of their wealth tied up in one or a few units, and therefore have to consider the full risks of each marginal investment they make. According to Xxxxxx and Xxxxxxxxxx (1991) the problem of free-riding refers to the situation where the franchisee tries to cut costs by offering a lower quality than specified by the franchisor. In these cases, the franchisee benefits from the system‟s well-known brand name, but at lower costs than the other franchisees. As a result, the franchisee‟s lower quality offerings might damage the reputation of the franchise system. The free-rider problem is particularly common in franchises with few or no repeat customers (Xxxxxxxx et al., 1991). The third agency problem concerns the issue of quasi-rent appropriation. A quasi-rent exists if the value of an asset is higher in its current use than it is in alternative uses. Quasi-rents arise when partners make relation-specific investments (Xxxxxx and Xxxxxxxxxx, 1991). In agency theory, franchisors have two basic tools to ensure franchisee cooperation: direct observation of franchisee behaviour such as monitoring and incentives and motivation to franchisee outputs (Xxxxxxxxxxxxxx et al., 2006). Xxxxxxx (2005) stated that agency theory suggests that franchisors want to reduce their organizational costs – monitoring costs in particular – by rewarding a franchisee‟s efficiency with profit. Moreo...
Agency theory. An assessment and review’. Academy of Management Review, 14(1): 57–74. Xxxxx, X.X. & Xxxxx, X.X. 2005. ‘High-performance work systems and organizational performance: The mediating role of internal social structure’. Journal of Management, 31(5): 758–75. Xxxxxxxx, X. & Xxxxxxxx, X.X. 2001. ‘Bringing open book management into the academic line of sight: Sharing the firm’s financial information with workers’. In X.X. Xxxxxx & X.X. Xxxxxxxx (eds), Trends in Organizational Behavior. New York: Wiley, 8, 97–116.
Agency theory. Next to the many publications concerning the agency problem, it is Xxxxxx and Xxxxxxxx (1976) who was most quoted (Xxxxx, Xxxxxxxx, Xxxxx, & Xxxxxxxx, 2019). They developed the agency theory, discussing problems within companies due to the separation between owners and managers as well as possible ways to solve or minimize such problems (Saraykina, 2019). An organization is regarded as a junction of contracts between individuals and groups, such as managers, shareholders, suppliers, customers, employees and so on, working together in the company (Deloof, Manigart, Ooghe, & Xxx Xxxxx, 2019). All these different stakeholders pursue their own objectives and can potentially conflict with each other. These conflicting interests are balanced through agency relationships, which are relationships between individuals based on a contract where one person (the principal) delegates authority to another person (the agent) to act on his behalf (X. Xxxxx & Xxxxx, 2018; Xxxxxx et al., 2019). Such agency relationships occur in companies where share ownership and management are separated. The shareholders of the company (principal) delegate a certain decision-making power to the managers (agent), who lead the daily management. This kind of relationship creates numerous agency problems caused by the fact that shareholders have different objectives compared to managers and vice versa. For example, a manager may decide, in his or her own interest, to take a high risk on investments as they are rewarded for good results, but do not suffer a loss in case of bad results (Xxxxxx et al., 2019). Xxxxxx and Xxxxxxxx (1976) proposed two ways for shareholders to ensure managers make decisions that maximize the value of their shares. First, the objectives of both parties can be aligned as much as possible by providing appropriate incentives, such as stock options for management. Secondly, a monitoring system can be built up, such as regular auditing of the financial accounts (Deloof et al., 2019). Conflicts of interest between shareholders and managers may also arise due to information asymmetry. Voluntary reporting and disclosure of (non-)financial information can limit this asymmetry and thus avoid or reduce agency problems (Jensen & Meckling, 1976). The above argues the importance of agency theory for this master’s dissertation. In addition, it is directly linked to the stakeholder theory.
Agency theory. According to Xxxxxxxxxx (1989), the agency theory reflects the basic agency structure of two parties, the principal and the agent. The agent executes the work, imposed by the principal. Agents are considered to be opportunists. Problems arise when the desires of the principal do not align with those of the agent, thus when the agent takes decisions that are especially interesting for themselves and not for the principals. Another problem occurs when it is difficult for the principal to control what the agent is actually doing, in other words, to verify whether he is behaving properly. Another conflict can appear when the principal and agent have different attitudes towards risk. Xxxxxx and Xxxxxxxx (1976), Dallas (1996) and Xxxxxx & Fama (1983) assert that agency costs consist of: - Monitoring expenditures by the principal: cost incurred by the agent to control the decision- making process of the agent - Bonding expenditures by the agent: costs incurred by the agent to convince the principal of his loyalty - Residual loss: costs incurred by the principal because the above costs were not sufficient to counter the decisions that are contrary to the principal's interests. The role of the board of directors is to reduce the conflicts of interest between shareholders (principal) and management (agent). They also try to diminish agency costs by separating decision management and decision control (Xxxxxxxxxx, 1989; Xxxx & Xxxxxx, 1983; Xxxxxx & Xxxxxxxx, 1976). To accomplish this, the board should include several of the organization’s top executives. The board collects relevant information through them about the decision initiatives. Information is also acquired through low level managers. All this information is used to set the rewards of the top managers (Fama & Xxxxxx, 1983). When boards dispose of enough appropriate information, compensation is less likely to be based on firm performance. Alternatively, compensation will be based on knowledge of executive behaviours. As a result, managers will take well thought-out actions and they will make more decisions in line with stockholder’s expectations (Xxxxxxxxxx, 1989). in agency theory, rewards are extrinsic and not intrinsic. These rewards include tangible, exchangeable commodities that can be clearly measured (Xxxxx, Xxxxxxxxx, & Xxxxxxxxx, 1997). The split-up of top-level decision management and control can only be successful if outside directors are motivated to execute their responsibilities without colludin...
Agency theory. An Assessment and Review. The Academy of Management Review, 14(1), 57–74. Retrieved from xxxx://xxx.xxxxx.xxx/stable/258191%0Ahttp://xxx.xxxxx.xxx/stable/258191?seq=1&cid=pdf- reference#references_tab_content Xxxx, E. F., & Xxxxxx, M. C. (1983). Separation of Ownership and Control. Journal of Law and Economics, 26(2), 301–325. Xxxxxx, X. (2005). Top director shake-up: The link between chairman and CEO dismissal in the UK. Journal of Business Finance and Accounting, 32(1–2), 97–128. xxxxx://xxx.xxx/10.1111/j.0306- 686X.0000.00000.x Xxx, X., & Xxxxx, C. D. (2008). Facilitating relational governance through service level agreements in IT outsourcing: An application of the commitment-trust theory. Decision Support Systems, 46(1), 216– 232. xxxxx://xxx.xxx/10.1016/j.dss.2008.06.005 Xxxx, X. X., & Xxxxxxx, S. L. (2007). Xxx Xxxxxxxx-Xxxxx Act: Implications for large-scale IT outsourcing. Communications of the ACM, 50(3), 95–100. Xxxxxx, X., & Xxxxx, X. (2008). A theory of board control and size. Review of Financial Studies, 21(4), 1797– 1832. xxxxx://xxx.xxx/10.1093/rfs/hhl030 Xxxxx, X., Xxxxxx, X., & Xxxxxxxx, X. (2005). Board Committee Structures, Ownership and Firm Performance. Xxxxxxxxx, X. X., & Xxxxxxxxxxx, X. (1993). Strategic alignment: Leveraging information technology for transforming organizations. IBM Systems Journal, 32(1), 472–484. xxxxx://xxx.xxx/10.1147/sj.382.0472 Xxxxxx, X., & Xxxx, G. C. (2004). The Role of the Board in Firm Strategy: integrating agency and organisational control perspectives. Corporate Governance, 12(4), 500–520. xxxxx://xxx.xxx/10.1111/j.1467-8683.2004.00390.x Xxxxxxx, X. X. (2005). Politicians on the board of directors: Do connections affect the bottom line? Journal of Management, 31(3), 464–481. xxxxx://xxx.xxx/10.1177/0149206304272187 Xxxx, X. (1998). A typology of the theories of the roles of governing boards. Corporate Governance, 6(2), 101–111. xxxxx://xxx.xxx/10.1111/1467-8683.00089 Xxxx, X., & Xxxxxxx, V. P. (2001). Stakeholders' expectations of board roles: The case of subsidiary boards. Journal of Management and Governance, 5(2), 153-178. Xxxxxx, X. X. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48(3), 831-880. Xxxxxx, X. X., & Xxxxxxxx, X. X. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. xxxxx://xxx.xxx/10.1016/0304- 405X(76)90026-X Xxxxxxxx, X. (2006). Th...
Agency theory. This paper uses agency theory as an analytical lens to identify the symptoms of contracts. Blockchain presents an alternative remedy to the symptom that has blighted the world economy. The relationship investigated in agency theory is one of the most commonly codified and oldest codes of social interaction. Agency theory revolves around the “principal-agent” relationship, where a “principal” hires an “agent” using a legal contract. As the “principal”, delegates work to another, the “agent” [Xxxxxxxxxx, 1985], with the agent thereby acting on behalf of the principal in a particular decision problem domain [Xxxx, 1973]. The essence of agency theory is the study of principal-agent relationships such as lawyer-client, buyer-supplier, and employer-employee, to name a few [Xxxxxx and Xxxxx, 1978]. The principal-agent literature intends to construct a blueprint for an optimal contract between principal and agent. Xxxxxxxxxx (1989) [Xxxxxxxxxx, 1989] shows that the problem domain studied in the principal- agent relationship is where the principal and the agent have different preferences for what the goal of the relationship is, and how much risk they are willing to take. The agent is, for example, compensated if one party prefers to whistle- blow when there are illegal practices in the relationship. Therefore, agency theory assumes that the principal and agent have different goals, known as a “goal-conflict”. Another aspect of the principal-agent relationship, “moral hazard”, is de- fined as the case where an agent neglects contractual responsibilities. For ex- ample, moral hazard occurs if an employee uses company time to work on a personal project. The employee’s tasks could be so complex that management fails to detect that what the employee is doing on company time. The employee (agent) violates the interests of the management (principal), and moral hazard occurs [Xxxxxxxxxx, 1989, Holstrm, 1979]. Another critical assumption in agency theory is known as information asym- metry, which emerges from the fact that a principal cannot monitor competen- cies and map out the agents’ intentions beforehand. It also arises when knowl- edge of an agent’s behavior is unclear and not deemed trustworthy. Xxxxxxxxxx (1989) [Xxxxxxxxxx, 1989] notes that agency theory regards information as a commodity: Information has a cost and can be purchased, and organizations can invest in information systems to control opportunistic behavior from the agent. As scholars such as Xxxxxx and...
