Jensen and Meckling highlighted agency costs in 1976, which include expenses such as monitoring, bonding, and residual losses. Monitoring costs are the charges that shareholders incur in order to oversee and supervise the acts of managers. Bonding costs are the monetary and non-monetary cost associated with building procedures or frameworks that encourage managers to prioritize shareholders' interests or provide adequate remuneration if they do not (Jensen & Meckling, 1976). Residual losses can develop when there is a mismatch between the acts of the principal and the agent, even when monitoring and bonding are in place. Fama and Jensen (1983) contended that residual loss occurs when the costs of completely enforcing a contract outweigh the advantages, resulting in a loss of potential profit.
The agency theory investigates the dynamic between shareholders and managers, depicting it as a classic principal-agent relationship.
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In this arrangement, the owners appoint managers to run the business with the primary purpose of serving the shareholders' best interests. Managers are fairly compensated for their efforts. The agent's efforts and potential hazards influence the success or outcome, but the principle cannot see them completely. This lack of information makes it difficult for the principal to assess and reward the agent's achievements. As a result, risk-averse agents may obtain bigger rewards because they are less likely to take risks. The insider model of corporate governance is distinguished by a strong reliance on bank financing, limited legal protection for minority shareholders, inadequate disclosure practices, concentrated ownership, a significant role for stakeholders in both ownership and management, and limited flexibility for mergers and acquisitions (Rosser, 2003). Furthermore, according to Solomon (2010), the enterprises in the insider model are owned and managed by a limited group of major shareholders. According to his analysis, the stockholders in concern might include lending institutions, corporate members, and the government. Furthermore, Solomon (2010) argues that the insider model includes relationship-based systems due to the strong tie between firms and their dominant owners.
At first look, it appears like a strong link between management and shareholders could help to mitigate the agency problem.
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However, if management and stockholders are primarily the same people, there may be less incentive to align their interests. Nonetheless, extra corporate governance difficulties appear to occur in these scenarios, particularly the weak separation of ownership and control, especially in family-owned enterprises (Solomon, 2010). There is a risk of minority shareholders' interests being expropriated due to a lack of transparency and knowledge asymmetry. This is because minority stockholders do not have access to any information about the company's operations. In such cases, unclear financial transactions and incorrect asset utilization are widespread (Solomon, 2010). that deliver little or no value to stockholders, and inefficient strategic decision-making harms the organization. Research undertaken in emerging markets has produced a variety of outcomes, particularly when investigating the relationship between a company's profitability and its corporate governance procedures. However, the data gathered thus far has not yielded a clear conclusion. Investor protection levels might vary depending on the governance arrangements in each jurisdiction. The concentration of ownership can have a substantial impact on managerial control and business performance, which differs by country due to varying legislative frameworks and enforcement methods. Furthermore, as demonstrated by Ararat and Dallas (2011), well-informed external "friends" may be trusted more than "independent" directors in some situations. This study will look at the impact of ownership structure and board of directors on business performance in Jordan, with a focus on the challenges raised earlier in the emerging market. To throw more light on these issues, the following chapter will present more material supported by empirical research.
Corporate Governance: International Principles and Practices.
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Previous research has identified two main models of corporate governance: the outsider (or Anglo-Saxon) model, which is used in the United States, United Kingdom, Canada, Australia, and New Zealand, and the insider (or Continental) model, which is used in Germany, France, the Netherlands, Switzerland, Sweden, Austria, Denmark, and Finland. Table 2 summarizes the essential features of the insider and outsider models. Put in some effort (Sappington 1991). The agency connection poses a difficult challenge to solve in terms of balancing incentives and dangers. The fundamental concern is how to find the appropriate balance between efficiency and risk-taking. The principal may decide to use other monitoring methods to guarantee that the agent performs as planned, which can result in additional monitoring expenditures to solve the information imbalance (Arnold and De Lange, 2004; Sappington, 1991). The issue of knowledge asymmetry is inextricably linked to the challenges of adverse selection and moral hazard. Principals frequently battle with a difficult issue known as adverse selection. This happens when they are unable to effectively appraise the talents and abilities of prospective employees.
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