In recent years, there has been considerable growth in accounting policies associated with development and modification of accounting theories. Implementation of accounting policies and theories is dependent upon nature of firms and criteria of business. The report is prepared by analyzing and reviewing agency theory in relation to problems and management implications. In this particular study, the implication of family firm performance, governance in relation to agency theory and stewardship theory has been explained by selecting a journal article. The journal article that has been selected for the purpose of explanation of agency theory along with its implications is “Viewing family firm behavior and governance through the lens of agency theory” by Kristen Madison, Franz. W. Kellermanns, Daniel T Holt and Annette L. Ranft (Madison et al. 2016). This particular journal article depicts that family firm is capable of creating agency government environment that are specific to such firms. Moreover, traditionally theorized agent behaviors are created in family firms.
Agency theory helps in the explanation of relationship between the two parties that is agent manager and principal agent. Chosen journal article addresses the relationship between agent manager and principal from the governance and behavioral perspectives. Description of relationship between agent and principal is delegation of work to managers from principal. It is suggested by agency theory that opportunistic self-interested behavior will be chosen by managers rather than behavior that are aimed at maximizing the interest of principal (Baumeister 2016). As such, behavior of managers is monitored by governance mechanisms. This intends to thwart behavior that is not aligned with the principal interests. Consequently, there will be alignment of interest and increment in the performance of firms.
Problems relating to agency are not expected in family firms and this is because of their feature of unified management and ownership and this leads to formation of an assumed environment characterized by unnecessary alignment and alignment of interest. Furthermore, it has been demonstrated by research that mechanisms of agency governance such as incentive compensation plan, board of directors, monitoring of activities helps in serving the intention within the family firms (Cordeiro and Tewari 2015).
This particular research paper has introduced the conflicts between new principal and agents that arises from non-family and family shareholder relationship. It had been perceived that the concept of agency theory was irrelevant to family firms and this research work has pushed beyond the boundaries by incorporating such theory in the family firms. Some of the aspects of family firms that led to deviation from agency theory are family involvement and non-economic goals (Dickinson and Sullivan 2014). In this light, there was inclination of research towards stewardship theory rather than agency theory. The governance of family firm stewardship is predictive to outcome of several pro organizational. Research conducted in this article helps in expanding the knowledge of governance and behaviors depicting contribution to theory that ultimately helps in facilitation of family firm performance.
There are certain assumptions that forms the basis of formulation of agency theory and this incorporates that rather than principals, it is agent that are exposed to risk and all the considered factors are rational. It has been suggested by comer researcher that for studying some peculiar problems of family firms, a fruitful and rich frame is offered by agency theory (Hussain et al. 2016).
Agent behavior of family firms- The behaviors that are uniquely related o family firms is attributable to some nontraditional problems such as misalignment of goals of shareholders and asymmetric altruism. It is suggested by agency theory that altruism is potentially exploitable as it is asymmetric and this can cause harm to family members. Moreover, there can be creation of adverse selection agency problems resulting from asymmetric altruism when instead of hiring non-family members, family members are hired. This hiring is done regardless of skilled and qualification of hiring personnel. It has resulted in creation of additional agency costs and decreased family performance due to creation of agency problems. Increased agency cost is witnesses in terms of governance mechanisms for assessing and monitoring behavior (Mariani et al. 2017). When there is a divergence between interest of managers and owners, opportunism is not only regarded as potential threat but it presents the threat resulting from the divergence of interest between minority and majority of shareholders. It is certainly possible that family firms at the expenses of financial gains will pursue some non-economic goals. There is a possibility of creation of conflict between non-family and family shareholders due to divergence of behavior associated with reasons that adversely affects the performance of firms.
The journal article elaborates the behavioral assumptions of agency theory that acre captured in environment of family firm. It is assumed by classic agency theory that non-family managers behave as agents and this is supported and theorized within non-family firms. It is depicted by research in their assumption that steward behavior is inherent within the family members and destructive agent behavior arises from asymmetric altruism and opportunism. Furthermore, it has also been ascertained from research that steward behavior is inherent in family members and this stems from cultivation of identification and commitment to family firms (Hanrieder 2014). It has been theorized that stewardship theory can be advantageous to firms and agency theory can be detrimental. Therefore, firm’s governance is a crucial factor as it has an impact on enhancing stewardship behavior and curbing agent behavior within firms.
Agency governance of family firms- The journal article also discusses and explains the components of governance of agency theory concerning family firms. Governance mechanism prescribed in agency theory for curbing opportunistic behavior and subsequently increasing the performance of firms. Literature of family firms is supported in the form of traditional prescriptions such as monitoring of activities, presence of board of directors and incentive plan compensations (Hoenen and Kostova 2015). It can be explained with the help of an instance that the board of directors is considered desirable. Family members in positing are monitored by outside board and for monitoring the business, family members are placed on board (Hitt et al. 2016). It has been revealed from the investigation that family run business experiences high level of performance if they use agency governance mechanism. Furthermore, it has also been investigated from the study conducted that pay incentives are required by non-family chief executive officers for creating alignment between their interest and interest of principal. This is attributable to the fact that family chief executive officers receive fewer incentives because family for helping them to avoid excessive personal risks structures the compensation system.
Research has also exposed some nontraditional governance mechanisms within family firms for supporting governance mechanisms of traditional agency theory. Ownership of family is described as a mechanism of effective governance of organization that helps in lowering the problems that are associated with management and ownership separation (Krause and Bruton 2014). It has been ascertained that agency related problems can be facilitated by family ownership such as lack of qualified family person who are taking position in firms and inability of making sound business decisions due to excessive emotional attachment. Therefore, for the alleviation of these family specific problems, it is essential to have agency governance mechanisms.
New principal agent relationship can be explored by research of family firm on agency governance. Article has also demonstrated the relationship between minority and majority shareholders along with the explanation of relationship between principal and manager. Extensions of agency theory have been done in the context of market institutions, emerging economies and new international business. Agency theory is also explained by conducting investigations into the outcome of new performance of family firms in relation to dividend and investment decisions, risk taking, avoidance of bankruptcy and firm level innovation.
The article is concerned with how the family affects the firms governance rather than focusing on individual level behavior within the firms. Family involvement has been investigated in relation to both agency and stewardship theory. Examination of stewardship and agency perspective is done in this article in the presence of board of directors. The agency environment is resulted from goal divergence and in the existence of board of directors that are larger in size and having high proportion of outside members. Contrary to this, when there is a high alignment of goals between manager and owners, there is likelihood of prevailing of stewardship environment resulting in reduced role of board of directors. The performance of family firms is higher that non-family firms after utilizing the insights that are derived from agency theory and it is because of lower cost of agency. Moreover, there can be negative as well as positive effect on internationalization effects in family ownership. Based on these views, it is ascertained that agency theory serves theorized purpose for enhancing the performance of family firms and enabling behavior that is pro organizational. Agency theory is often perceived of monitoring mechanisms and it is depicted that family firms employing such mechanisms does not imply that they cannot have collectivistic cultures (Pepper et al. 2015). Such collectivistic culture helps in curtailing of undesired behavior within the firms as they also helps in imposition of norms. Decision making process within the firms receives insight from the perspective of agency theory. Agency theory is explicit in assumptions in the sense that information between parties is asymmetric. Irrespective of information asymmetry level, mechanisms of governance are put in place for aligning the enhancement of performance and goals of firms (Pugliese et al. 2016).
Explanation of importance of agency theory in the article has been done in relation to stewardship theory. However, the research conducted in this article comes with limitations. For understanding the governance, behavior and performance of family firms, researcher has made considerable strides. Treatment of agency theory is done in a dichotomous way as this provides a value added contribution. It is ascertained from the analysis of article that there is occurrence of traditionally theorized agent behaviors in association with the fact that this theory is also informed by firm specific elements. Intended purpose concerning performance of family firm and pro organizational behavior is served by governance mechanism of agency theory (Jaskiewicz et al. 2017). Nonetheless, the factors that are unique to family firms is the involvement of family firms in the creation of agency theory.
Conclusion:
From the analysis of the chosen journal article, it can be inferred that the adaption of agency theory in the family firms comes with both advantage and disadvantages in light of different contexts such as governance and behavior of firms. The principal agency problems experienced b firms can be reduced due to transparency in the family business. It has been ascertained from the analysis of the article that agency problems in the family firms can be reduced by their successful balancing and adoption of appropriate governance structures. It has been deduced from the article that number of factors creates agency problems in family firms. Agency theory helps in development of framework that has considerable degree of relevance in analyzing the behavior of firms. Firms experiences opportunistic behavior due to lack of external monitoring and this is because management and family ownership reduce the agency cost.
References and Bibliography:
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Cordeiro, J.J. and Tewari, M., 2015. Firm characteristics, industry context, and investor reactions to environmental CSR: A stakeholder theory approach. Journal of Business Ethics, 130(4), pp.833-849.
Dickinson, H. and Sullivan, H., 2014. Towards a general theory of collaborative performance: The importance of efficacy and agency. Public Administration, 92(1), pp.161-177.
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Hanrieder, T., 2014. Gradual change in international organisations: Agency theory and historical institutionalism. Politics, 34(4), pp.324-333.
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Krause, R. and Bruton, G., 2014. Agency and monitoring clarity on venture boards of directors. Academy of Management Review, 39(1), pp.111-114.
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