Stewardship Flavored Agents for Anglo-American Models in the UK, South Africa, and India

Shantha Indrajith Hikkaduwa Liyanage ()
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Shantha Indrajith Hikkaduwa Liyanage: Botho University

Chapter Chapter 2 in Corporate Governance and Sustainable Value Creation Models, 2025, pp 25-58 from Springer

Abstract: Introduction The agency theory assumes that shareholders of a company are owners of the company and directors are agents of the shareholders who delegate their powers to the directors to run the day-to-day business and affairs of the company to maximize shareholder wealth. As a result, the Principal–Agent relationship arises between the shareholders and directors, respectively. The unit of analysis of the principal–agent relationship is the agency contract, which is subject to certain assumptions. Among them, self-interests of the principal and agent and information asymmetry between the principal and agent are important. Self-interest of the agent means that the agent as an economic man maximizes utility by acting for the agent’s self-interests at the cost of the principal. Information asymmetry means that the agent who runs the day-to-day business and affairs of the company has more information than the shareholders. As a result, the agent may act conflicting with the interest of the principal. This is called the type I agency problem by which the principal incurs a loss called the agency cost. Hence, the agency theory advocates to make the agency contract efficient for achieving the interest of the principal by alleviating the agency problem. However, the agency problem expands to type II agency problem and Type III the agency problem more fully dealt with the Chapter 2. Type II agency problem arises between the majority shareholders and minority shareholders. Type III agency problem arises between the company and non-shareholder stakeholders. Though strong mechanisms have been developed for addressing the type I and II agency problems in the Anglo-American model, there was a less attention paid for addressing the type III agency problem. However, recent modifications founded on the purpose of the company dealt with the Chapter 1 to the United Kingdom, South Africa, and Indian Companies Act started developing mechanisms for addressing type III agency problem. These three corporate value creation models are discussed in the chapters 3 to 5 respectively. Chapter 6 and 7 deals with the Botswana and Sri Lankan Anglo-American models and Chapter 8 deals with the Continental European model.

Date: 2025
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DOI: 10.1007/978-3-031-71612-6_2

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