USA and Canada Business Environment Comparison

The principal-agent paradigm provides explanations and answers to a variety of agency difficulties. It uses incentive-alignments to avoid disputes and governance structures to resolve conflicts. In practice, principals and agents must strike a fine balance between motivating agents with appealing performance-based rewards and protecting them from risk by offering reduced performance-based incentives. Thus, the agency problem stems from the confusing challenge of sharing incentives and risks (Hart, 1995). Coordination and communication issues increase as the board grows in size. This can reduce the board's ability to properly monitor management, exacerbating the agency problem (Eisenberg et al., 1998).

Jensen and Meckling (1976) conducted groundbreaking research on the principal-agent relationship and corporate ownership structure. 


They emphasized the importance of managers' stock ownership in aligning their interests with those of the owners. Furthermore, Fama and Jensen (1983) highlighted the role of the board of directors in overseeing potential opportunistic behavior among executive managers in major businesses. Agency theory is largely concerned with the institutional arrangements, such as ownership structure and organizational structures, that influence conflict inside firms. This is strongly tied to property rights, as the distribution of property rights is critical in determining principal-agent interactions. When it comes to the board of directors' corporate governance systems, agency theory implies that non-executive directors (NEDs) play an important role in supervising and monitoring CEOs. This is because NEDs are thought to be autonomous and motivated by their own reputations (Fama and Jensen, 1983). NEDs can provide enterprises with valuable external knowledge and skills, as well as a key monitoring function (Fama, 1980; Fama and Jensen, 1983). Based on this perspective, it is advised that the chairman and CEO hold the same positions. This is because delegating responsibility and making choices to a single person can lead to a better grasp and knowledge of the company's operations. This, in turn, can lead to improved decision-making and fewer agency difficulties, hence improving the firm's performance (Dalton and Kesner, 1987; Donaldson and Daives, 1991).

Stewardship Theory

In a similar vein, resource dependency theory proposes that non-executive directors (NEDs) contribute to improved firm performance through their valuable input in decision making, such as investment and strategic planning decisions, as well as their ability to network with the outside world and other stakeholders. Agency theory and resource dependency theory both show that the inclusion of non-executive directors (NEDs), also known as board independence, is associated with improved corporate performance. Stewardship theory, on the other hand, contends that insider directors, who have a more in-depth grasp of the company's operations, can more effectively monitor management than non-executive directors. Stewardship theory can impede part-time/ceremonial NEDs' monitoring function, making their participation to decision making unimportant (Bozec, 2005). Unlike agency and resource dependency theories, stewardship theory proposes that NEDs may have a negative impact on corporate performance.  As a result, individuals increasingly rely primarily on information provided by management and lack the contextual understanding required to make independent decisions. Non-executive directors (NEDs) suffer the same issue of inadequate expertise as the rest of the board. According to stewardship theory, boards with fewer insider directors are less likely to improve business performance since they have a limited ability to oversee managers and make sound judgments.  Furthermore, agency theory implies that having separate chairman and CEO positions is advantageous. This is because the chairman's primary responsibilities are to compensate the CEO and supervise the board. When these duties are consolidated into one person, it can lead to further agency issues and impair the effectiveness of monitoring the CEO (Jensen, 1993). However, stewardship theory indicates that effective management is based on the idea of unity of command, making it

Resource Dependence Theory


The resource dependence paradigm emphasizes materialism over the organization itself. Its primary focus is on businesses' ability to acquire resources such as knowledge and money. According to resource dependence theory, corporate governance arrangements such as the board of directors influence a firm's access to critical resources for performance (Pfeffer, 1973). Resource dependence theory strongly supports the idea of having a large number of non-executive directors (NEDs) on boards. This is because NEDs bring a wide spectrum of skill and information, as well as improved contacts with the outside world and a higher overall reputation (Haniffa and Cooke, 2002; Haniffa and Hudaib, 2006). As a result, NEDs can assist in making connections with governmental and corporate relationships, as well as obtaining funding and information. This can be accomplished by developing stronger ties with external stakeholders such as customers, governments, and other businesses. As a result, NEDs increase access to important resources, resulting in more cost-effective inputs and, ultimately, better business performance NEDs can also help to broaden the board's competence. However, this can occasionally lead to poor decision-making and communication, as seen by the less spectacular performance of larger boards (Lipton and Lorsch, 1992; Jensen, 1993). 

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