Here, the agency problem
that is commonplace in publicly owned corporations is much less apparent, at least as far as these company officials and favored employees are concerned.
An agency problem
, however, arises if managers serve their own interest instead of shareholders'.
Despite being significant driving force in the Asian economies, family firms are also labeled with potential sources of conflict of interest and agency problems
. "Agency problem
Type I" is originated from the conflict of interest between shareholders and managers (Shleifer and Vishny, 1997), whereas "agency problem
Type II" is originated from the conflict of interest between concentrated majority and diverse minority shareholders (Bhaumik and Gregoriou, 2010).
The role of the board is to reduce the potential agency problem
and the vulnerability of corporate expropriation through monitoring, representation and oversight responsibilities.
However this theory does not take into account the enterprise agency problem
. The key assumption concerning the agency problem
, at the private enterprise level, is that private ownership is associated with a more effective incentive structure than public ownership; and there will be less scope under private ownership for managers and workers to pursue their own objectives at the expense of the shareholders.
Ideally, the contract between the CEO and the stockholders should resolve the agency problem
. However, even with the most appropriate design and intent, a contract which details the CEO's duties and the permissible boundaries of actions is ultimately second-best.
Firm with high Family ownership has a unique agency problem
which is associated with shareholders who also invest in the company.
The empirical research was conducted in the investigation of the dividend policy and related agency problem
which arises between Management and Owners of the firm.
The theoretical approach to deal with the agency problem
can be divided into two broad groups.
The relevant agency problem
in widely held firms is not the one between controlling owners and minority shareholders but, rather, between professional managers and shareholders (Jensen and Meckling, 1976).
The authors find empirical evidence that audit quality is beneficial in mitigating the agency problem
in firms by making executive compensation more responsive to accounting-based performance.
Other authors, however, believe that greater diversification with greater concentration of ownership is not to reduce risk but because the majority shareholders (who are in turn the firm's managers) are seeking greater profits and benefits even if it is at the expense of the wealth of minority shareholders (this is known as tunnelling, which is defines as the transfer of firm assets and profits to controlling owners) (agency problem
type II) , , , , .