The schizophrenic board secretary: An embedded agent between multiple stakeholders and financial misconduct

Bin Liu, David Ahlstrom and Yutong Zhang

The British Accounting Review, 2025, vol. 57, issue 4

Abstract: While agency theory has long informed both research and practice in emphasizing good corporate governance in preventing financial misconduct, monitoring bodies do not always function so well, especially in transition economies. By integrating the stakeholder-agency perspective with prospect theory, this study provides a new explanation of such dysfunction by introducing an embedded agent concept that manifests a “schizophrenic” status of agents which creates a need to satisfy multiple stakeholders and their conflicting interests. Drawing on a sample of small-to-medium-sized enterprises (SMEs) listed on the Chinese National Equities and Exchange and Quotations system from 2014 to 2017, it is shown that having a board secretary did not help reduce financial misconduct as the government had hoped, because of an embedded agent problem. However, their dysfunctional status would largely disappear, and they would perform their monitoring responsibilities if given higher equity shares and stricter subnational regulations -- two key contingencies that better align embedded agents’ interests with one group of stakeholders. Overall, this study contributes to the corporate governance literature by introducing the embedded agent concept and its theoretical boundaries, along with a focus on transition economies.

Keywords: Embedded agent; Financial misconduct; Stakeholder-agency theory; Prospect theory; Small-to-medium-sized enterprises; Transition economy (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:57:y:2025:i:4:s0890838924000234

DOI: 10.1016/j.bar.2024.101323

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