The New Perspective of the Agency Problem

In the traditional literature of economics and leadership it is always mentioned that, in general, every company has to deal with the Principal-Agent -Problem, the Agency Problem or so-called Agency Dilemma. Contrary to this generalization, authors like Lubatkin et al. were able to provide evidence against this, showing that the Agency problem suffers from a made in the US bias. This means, it cannot be transferred or applied to every other country, as every nation has unique and different characteristics. In this paper, I will interpret leadership styles, or the most likely opportunistic behavior of an agent of various nations, by analyzing the background that forms a manager, e.g. information like background education, formal institutions and primary socialization. This was also done by Lubatkin et al., but their focus was on contexts of the US, France and Sweden. The research of this paper is built on their model but used to examine other nations with the goal of providing an answer to the following problem statement: To what extent does leadership coevolve with different national backgrounds creating an agency dilemma? The purpose of this research paper is, therefore, to explain the extend or degree the American manager, Western European manager, Soviet socialist manager, Chinese manager and the Japanese manager will be confronted with the Principal-Agent problem. The underlying literature of this paper is taken from the chapters of the text book and the academic journal papers, used in the group tutorials of the course Comparative Management. To answer the above problem statement, I will start with an introduction, providing the reader with an understanding of the agency dilemma. Following this is a general overview of the National Bounded Model of Principal Agent Relationships developed by Lubatkin et al., which serves as a basis for the study of the different manager styles, their differences and their similarities. I will begin with an outline of important aspects of the American manager in section I, followed by section II, the Western European manager. In section III I will give an overview of Soviet socialist manager, followed by section IV and V, the Chinese manager and the Japanese Manager respectively. Last but not least I will discuss and compare the specific nations with their leadership styles to answer the problem statement.

Introduction The core message of the agency dilemma is that a manager can act on his own behalf. To hinder a manager from hiding information or acting on his own interest, a principal is forced to monitor or set rules to limit the managers possibilities. This kind of problem arises is common in many corporations, where a manager is allowed to act as an authorized agent (Lubatkin et al, 2005). By understanding the basic problem that is underlying the use of an agent in a corporation, we can go on to the model created by Lubatkin et al. in the journal Origins of corporate governance in the USA, Sweden and France published in Organization Studies. The model (Appendix A) visualizes the agency problem and it, additionally, explains why the attitudes of a manager differs from his behavior and how the principal`s governance mechanisms can function in a limiting way. From here, I will give a short overview of this model, to understand how this paper with will contribute to the problem statement by using it. To get a good understanding we should start by point E, which is called Background (Social) Institutions. This is one of the most important parts of the model as it creates the first framework of attitudes that will shape the behavior of a manager. It represents the first social experience of an upcoming agent through family, school education or religion. It has a strong influence on point F, called the primary socialization of an agent and on point D, called formal institutions. Point F demonstrates the norms and believes of an individual based on point E. It will further influence two different parts in the model. On the one hand the agents behavior itself, on the other hand point C, the governance mechanisms. The latter will also be influenced by point D, the legal framework of a country. Therefore we can assume that the principal-agent relationships will be nationally bounded by the unique culture of a nation and that it must differ from other nations.

Section I American manager In this section I will start to fill in the most appropriate views of a typical American manager in the above mentioned model. Therefore we get a general understanding of how to look at an American agent and his behavior. Afterwards I will try to expand this view and underline it by using the main findings of an article written by Hamlin, which deals with the different

approaches of the stakeholder theory in America and Europe. Then I will conclude the first section in regard to the problem statement. A typical American manager enjoys a high level of personal independence and values high tolerance for risk and change. This is derived from the early immigrants who escaped from Europe because of its social, political and religious limits. These people started as independent farmers or were workers with strong survival instinct and work ethic. Therefore, searching for opportunities was fundamental to increase income and wealth. Nowhere else in the world is the education system, especially the higher education for business, so focused on preparing managers for the business world. An American Agent has a high salary, which is often tied to performance indicators. Moreover, they are facing low political risk as legal and regulatory ground rules will not be changed without discussions by the government. But there is also a lot of pressure due to the high competition of companies that forces agents to change in order to be successful. The unions are much weaker than in other industrialized countries, so that a CEO has, comparatively, much more freedom to operate the corporation according to his will. These factors all contribute to their leadership style, as their priorities are personal goals like high payments or personal challenge, rather than the loyalty to his employer, employees or even families. His attention is focused on increasing shareholder value, with a tendency to ignore or having less focus on his stakeholders. There is also one more good reason for this attitude, as US companies finance their activities more with equity than debt and therefore have to show high earnings in every report. They must be focused on maximum short-term financial returns, which is an important criterion for firms. Furthermore, the average holding period for common stocks is less than one year, which means there is a lot of pressure to perform well to keep their shareholders. There are also many more takeovers of companies in the United States (Edfelt, R.D., 2010). The article Stakeholder theory and practice in Europe and North America: The key to success lies in a marketing approach written by Jrgens et al. shows, that the stakeholder models of the US and European society are just using the same common terminology, but different approaches. In the American stakeholder model there are two conflicting perspectives: On the one hand there is the shareholder-value maximization model, which sees the corporation agents as independent managers, whose sole role is to increase the shareholder-value. On the other hand, the stakeholder approach also wants primarily to increase money, but also to satisfy other stakeholders like the employees. The authors exclude the British and Irish model in the European stakeholder model, as they are similar to the

American approach. In general, the northern European model, especially Germany, uses a system of co-determination. It is derived from corporatism, in which a single decision integrates different groups equally, like employees and shareholders, to distribute power and integrate social issues. As we can see so far, both models try to maximize the shareholder value, but with different approaches. Therefore, the authors say that an American agent will face unexpected problems in Europe. The solution suggested by the researchers is to use a marketing approach model (see Appendix B). Stakeholder management is a dynamic interaction between society and firm. Therefore the first step is to identify important stakeholders by making a list. This is new for an American Agent doing business in Europe, as his important groups so far were shareholders only. The firm has to look to other successful firms, as they will have the same stakeholders. The next step would be to analyze media statements or direct interactions with stakeholders, to find their needs and expectations, followed by developing appropriate firm policies and behavior to meet their expectations. The last step is to monitor, especially the public media comments by their stakeholders, to see if policy and behavior are good enough to survive in Europe. As a first sub-conclusion one can say, that an American agent is independent and money orientated. Moreover the American stakeholder model has two conflicting aspects, because one deals with profit maximization and the other tries to increase the shareholder-value by satisfying other stakeholders. Furthermore, an Agent does not have any kind of limitations as the government should not influence his decisions. Therefore, I hypothesize, that the leadership style could contribute to an agent dilemma like in the case of Bernard Madoff (Appendix C).

Section 2 Western European Management In this section I will start with visualizing the general picture of a Western European manager and his environment, i.e. where he operates. Following this is an article that gives an understanding of the different meanings of HRM in regard to Europe and the US, as HRM also contributes to the general approaches of an agent in a corporation. I will then conclude the main points to further contribute to the answer of problem statement above. The European value system is based on a Judeo-Christian view, which has a strong emphasis on equal wealth and income. In general, there is a lot of variation between the nations, but

also within them. A typical Western European manager has a balance between work and private life, some even with an intention to serve the state and not to focus on money. In the Mediterranean Europe, high uncertainty avoidance can be found, which leads to stronger personal bonds between managers and subordinates, while in the Netherlands and Sweden avoidance uncertainty is lower and thus weaker bonds. The cultural diversity is high and there is a tendency of stronger orientation towards people than in the US. The European agent is well prepared and educated in business and management but, although differing from country to country, still behind the standards of their American counterparts. The government has influence on business operations, decisions and it consults with labor unions about labor policies. The labor unions themselves are influential, powerful and in some countries even have their members in the company boards of directors by government law. Therefore, a European agent has less freedom to create polices in regard to internal practices. Managers have a sharp focus on cost reduction and good sense for quality and the European manager has to cooperate with non-shareholders to be successful. Big corporation have two boards: one is the management board with senior executives. The other is a supervisory board, which represent the stakeholders. An important aspect is, that companies are allowed to share their firm information annually and not short-term oriented as the US firms, which leads to less pressure for the management. Moreover some firms have large shareholders, which are not willing to sell their shares and support the company. Furthermore, a takeover will also sometimes be blocked by the government to protect local industries from foreign ownership (Edfelt, R.D., 2010). The article Comparative HRM: European views and perspectives written by Chris Brewster highlights the differences of HRM between a US and European view. The classic assumption of the US HRM model is, that a company has the freedom to manage his personnel in a way without external influence of others like the government. The European context cannot be generalized, but the government support, the legal constraints and the labor unions influence HRM. The HRM from a US perspective can be applied in Europe with some differentiations. The US culture is more individualistic and performance-based and allows a hire-and-fire mentality in HRM, while the European businesses must be controlled in a way that companies are socially responsible for their workers. Therefore the government has a high involvement in decision making and supports the role of HRM trough post-education trainings. The management of people and supervisory training has a high priority in Europe. Another feature is the trade unionism, which is socially legitimate by government law. Companies are affected

by trade unions or work council to act in an appropriate manner in regards to their workers. One can see that the employment contracts are deeply influenced by institutional and legislative factors rather than HRM alone. Moreover the public ownership is decreasing in Northern Europe and, especially in Germany, a network of banks exists, which is holding big parts of ownership of different companies. The author concludes that HRM practices are unlikely to work out in different national contexts. Based on this, the second sub-conclusion to the problem statement is that a Western European manager has a tendency to be more orientated to people and is also limited by the HRM department concerning his interactions. Moreover, there is a strong labor union, especially in Germany, which would react negatively to selfish maneuvers.

Section III Soviet Socialist management This section will deal with the extreme case of state socialism in Russia, before its fall. I will also highlight an article dealing with the organizational culture and effectiveness in Russia. Afterwards, I will summarize important aspects that will contribute to the problem statement. State socialism refers to the complete ownership of production and allocation of resources by the government. Many of these economies are, nowadays, mixed economies or free economies. The Soviet Union is a good example of how the societal macroenvironment shaped the leadership and organization within a country. It was highly centralized and did not allow for private property. It also limited the freedom of their civilians in order to protect the common good. Education was specialized on planning and decision making. The economic bureaucracy of the central government and the Communist party had the supervision of economic, social, labor and media decisions. Even the labor unions were controlled by them and all employees were their members. A Soviet Socialist agent had no worries about competitors, as they did not exist. The only pressure was to achieve the goals, set by the state bureaucracy and the communist party. By not producing enough, one could lose bonuses and could even be sent to labor camps. A typical manager had a low autonomy and was, in reality, more of a government executive. Therefore, takeovers were not practiced and experienced. This enterprise system led to many problems, which were then tried to be solved by reforms. The milestones were introduced by Gorbachevs glasnost, which led to the perestroika, the restructuring of the corporations in Russia (Edfelt, R.D., 2010).

The article Organizational culture and effectiveness: Can American theory be applied in Russia? written by Fey and Denison investigates the link between organizational culture and effectiveness of foreign-owned firms operating in Russia. In this study, they used a four cultural factor framework (Appendix D) to examine the idea that organizational culture can influence the effectiveness of a corporation. Involvement reflects the feeling that people at all levels have some influence on the decision making process. Consistency is a source of internal integration to reach an agreement, due to a common mindset. Adaptability is dealing with change and improvement within the organization to satisfy customer needs. Mission stands for the defined goal of a corporation, which gives the organization purpose and direction. Moreover, it was explained that measurement of effectiveness, like profitability, is highly correlated with the factors mission and consistency, innovation correlates with involvement and adaptability and sales growth correlates with adaptability and mission. A factor analysis of the Russian data showed that all cultural dimensions are less correlated with overall performance, employee satisfaction, quality and product development, compared to the US. But it also showed that the four factors were highly correlated with market share, sales growth, profitability and an effectiveness index. Therefore, the authors concluded, that adaptability and involvement had a strong correlation with the effectiveness index, the overall performance, profitability and the product development, while involvement and mission correlated with market share, sales growth, employee satisfaction and quality. In the Russian context adaptability and involvement are the most important determinants of effectiveness, but in the United States, context mission is correlated with effectiveness and involvement with employee satisfaction as well as the overall effectiveness index. In both cases, involvement played a big role. Moreover, Russia is in a transition economy, so flexibility is more associated with involvement and adaptability. Therefore, adaptability is the most important factor in the model to interpret the overall effectiveness. I assume, that agency problems could not exist during the Soviet Union, as agents were strongly controlled by the government and were just acting as executors. Nowadays, as Russia is in a transition mode, there could be a possibility for agents to act on their own to gain profits as adaptability is an important factor.

Section IV The legacy of china This section will start with an overview of the Chinese environment and characteristics of the leadership attributes. Afterwards, an article will analyze the effectiveness of influence tactics between mangers of the United States and China. Then I will summarize the results to answer the problem statement. China and most parts of Asia are deeply influenced teachings of Confucius. Therefore, the culture has a high aversion for shame, which contributes to saving face and group consciousness. Business activities include personal connections and trust to suppliers, customers and employees, which is expressed by the word guanxi. Guanxi is an important strategy to establish relationships or networks of companies through trust, favors and influence. Moreover, because of the limited social welfare of the state, the family is the foundation of the sociopolitical order. A typical Chinese agent will be selected through trust and loyalty and he will underline it with a direct investment in the company, to become a part of the ownership. In China, a patriarch leadership with strong personalism and loyalty is common, which influences colleagues and subordinates to ensure performance. An important aspect is not to embarrass people to avoid loss of face. This strong personal loyalty reduces managerial turnovers in contrast to the Western World. Mostly, the shareholders of stock exchange listed firms are the family members, employees or the state, which shows that control is more important than profits. Therefore, the pressure of takeovers is lower in East Asia compared to the US or Europe (Edfelt, R.D., 2010). The cross-cultural study Perceived effectiveness of influence tactics in the United States and China written by Fu and Yukl investigates the differences in influential behavior of American and Chinese managers. It is mentioned, that culture has a strong effect on performance, attitudes and behavior of agents in companies. From prior studies it is known that Chinese executives have a high value for uncertainty avoidance, power distance, collectivism, long-term orientation and femininity in contrast to American managers, which are more comfortable with uncertainty, individualistic, short-term oriented and masculine. These values are unconscious and shape social norms and management. Therefore, it is important to understand these, in order to to avoid negative reactions in contact with other agents. The study examined seven tactics, by which four showed significant differences and reflected cultural variation (Appendix E). Rational persuasion indicates the strongest influence of an American agent, while a Chinese manager would be less likely to use it, as it

can be provoking and lead to loss of face. The US executives also prefer the use of direct confrontation, which could lead to time consuming efforts but could influence the target. This is not appropriate in a Chinese context. They would more likely use an indirect approach, i.e. a third party. Therefore, they will rather use coalition tactics and upward appeals, than their American counterparts. In Chinese tradition, it is normal to use little gifts for relationships, while in the United States this would be inappropriate. Thus, American agents not use them, but Chinese agents will. Last but not least there was no significant value by using pressure or ingratiation by both groups. In a nation, which is characterized by strong loyalty and agents using coalition tactics and guanxi networks, acting on personal goals would lead to loss of face.

Section V Japanese Management In this section, I will give a short overview of important aspects of the Japanese environment, followed by an article, which highlights the negotiation behaviors of US managers with their Japanese counterpart. This section will be concluded with an approach to solve the problem statement. The Japanese culture is rooted by the value system of Confucianism, including groupism, hierarchy order and authority. Moreover, they have a common sense for equal distribution of income and wealth.. The situation in Japan can be understood as company hunting rather than job hunting. The company itself is important, not the job. A dominant characteristic of the Japanese people is highly valued personal honor, coexisting with the importance of maintaining face. During their education, children and students learn how to behave in ways that benefit the public and their surroundings. A special aspect in their economy is that labor unions are created within a company and not by the industry. Even in the board of chairs there usually is a former CEO, which leads to less confrontation and pressure towards managers. The typical Japanese agent should ensure the employment of his workers and increase their economic situation, which shows the social side of their leadership attributes. Moreover, they lead by kindness and generosity and are not focused on profits as long as other required results are achieved. They value and act in keiretsu business groups, which is seen as a family of independent companies that assist and protect each other. Furthermore, there is a crossownership of stocks between these companies to ensure trust and cooperation. Other

shareholders interests are not a priority and the pressure of takeovers is lower, as such strategies are immoral and social irresponsible (Edfelt, R.D., 2010). The article Negotiation behavior when cultures collide: The United States and Japan

written by Adair et al. compared the negotiation behaviors of US and Japanese managers in intra- and intercultural situations. It is proposed that cultural background is one of the most important factors in influencing negotiation behaviors. Therefore, one party has to adapt their behavior patterns to increase a successful outcome. One point is that Japanese and US agents exchange information differently. In a low-context culture like the USA, it is typical to communicate directly, while Japan is a high-context culture, which means communication in an allusive way. This leads to the assumption that US managers will disclose information and Japanese managers will more likely hide information and try to get to a result through offers and counteroffers. Another point suggested by the authors is that Japanese negotiators are more likely comfortable to highlight their power of their company in intercultural meetings than US agents. Furthermore, it was pointed out that during intercultural meetings, the Japanese side would adapt to US negotiation behaviors, but not vice versa. Moreover, it was not supported by research that during intercultural negotiations one would lack the motivation to adapt, but it was mentioned that there could be a lack of skills to adapt. The study also analyzed two data sets of US contracts and Japanese contracts. The US data showed a negative correlation between group membership and joint gains, which indicates that in intracultural negotiations the US agents created more joint gains than US-Japanese intra-cultural negotiators. Moreover, direct information sharing was positively correlated to joint gains, while there was a negative correlation with indirect information. The other data set showed that Japanese intra-cultural negotiators created better joint gains than in intercultural contexts. In an intra-cultural environment, US and Japanese agents prefer different behaviors. Despite that, the authors underlined that adaptation is not enough in intercultural negotiations. It is highly important to share information in an effective way and that both parties find an acceptable agreement. Japanese agents learn to act in a public sense during their early days. They are not primarily focused on money. Moreover, they cooperate in keiretsu businesses and value maintaining their face. Therefore, I assume that such a leadership style would not contribute to an agency problem.

Conclusion It is obvious that not all agents will fit in the behavior stated above and it is not possible to generalize a nation, especially not the European Union as a whole. It is also not possible to generalize that it is possible to find the agency problem everywhere. It has the tendency of having an US-bias, because there it was created. An American leader is characterized by freedom and self-fulfillment. Profit-maximization is expected by their shareholders and they have the tendency to leave and invest their money elsewhere. Therefore, an agent has to act risky to increase value. The European manager is more regulated by labor unions, they cannot act on free will. Moreover they are more likely to cooperate with other stakeholders to find legacy in society as the supervisory board monitors them. In the previous Soviet Union an agent had to follow commands of the government and was strong limited in regard of managing the company. There was no chance for them to act selfish. In the Chinese economy the major shareholders are the state, members or the family. They are using guanxi relationships with others and value gifts and coalition tactics. Therefore, I assume that betrayal would lead to loss of face, which will be highly avoided. This is also the case for Japanese mangers. In the regard of face, the Japanese are similar to Chinese managers. They are investing their own money in their company and hold shares of their keiretsu groups. Because of that, I assume they would also not contribute to the agency problem.

Appendix A

Appendix B

Appendix C Wall Street's Latest Downfall: Madoff Charged with Fraud by STEPHEN GANDEL, Friday, Dec. 12, 2008 Bernard Madoff, the former Nasdaq chairman who was charged on Thursday with massive fraud, was long considered to be quirky. Employees at the offices of his eponymously named brokerage firm in midtown Manhattan's Lipstick Building had to follow strict rules for what they kept on their desk. Family photos were allowed but only if they were displayed in a simple black frame. Now it looks like Madoff, who went by Bernie, may also have been a crook, and quite possibly one of the largest Wall Street has even seen. According to the U.S. Attorney's office in the southern district of New York, Madoff admitted to defrauding clients for up to $50 billion in a massive Ponzi scheme that was committed over a number of years. (See the top 10 scandals of 2008.) Madoff was best known for being a pioneer in the business of market-making. His firm, which he started five decades ago with money he earned as a lifeguard in Far Rockaway, Queens, was for a long time primarily in the business of acting as a middle man between buyers and sellers of stocks. It is an essential function for a market like the Nasdaq, which doesn't have an actual trading floor where buyers and sellers can meet face-to-face. Madoff's firm was a major driver behind the growth of the Nasdaq, creating a system that courted brokers who had mostly traded stocks on the larger New York Stock Exchange to do more of their business with the Nasdaq. "He brought a lot of business to the Nasdaq," says Alan Davidson, a former Nasdaq board member and president of brokerage Zeus Securities. "He was a powerhouse on the NASD board. It's a real shock." While many other boutique brokerage firms sold out to larger firms, Madoff Securities stayed a family business. Madoff for years ran the firm with his brother Peter. More recently, much of the market-making division was headed by Madoff's two sons, Andrew and Mark. In the 1990s, Madoff used his success as a market maker to help launch an asset-management firm. Madoff raised money for his fund by exploiting his social network, often courting investors at country clubs where he or family members belonged. At the Palm Beach Country Club, Madoff reportedly found a major investor who helped attract other members for Madoff's fund. Many of Madoff's clients invested in his funds through a number of feeder funds, which were sold by other firms. Like supermarket brands, the funds carried the name of the investmentadviser firm, which then sent the money to Madoff to be managed. One such fund, the Tremont Broad Market Fund, attracted billions of dollars to Madoff. Many of these funds leveraged their own investment in Madoff's funds, which could amplify the losses felt by the collapse of Madoff's firm. (See the top 10 worst business deals of 2008.) Another Madoff feeder fund was run by Maxam Capital. The head of that firm, Sandra Manzke, a former head of Tremont, has recently been outspoken about misbehavior in the hedge-fund industry. She recently sent a letter out to hundreds of hedge funds berating them for their large fees and for halting client redemptions when funds were down. "I am appalled and disgusted by the activities of a number of hedge-fund managers," she wrote in late November. Madoff was a donor to the Democratic Party and to Jewish organizations. A number of large Jewish charities are expected to be among the investors who lost money in Madoff's funds. Madoff was chairman of the board of Yeshiva University's Sy Syms School of Business and treasurer for the university's board of trustees. A representative for Yeshiva said the university was still trying to find out if the institution had invested money with Madoff. Also among

Madoff's investors was Fred Wilpon, owner of the New York Mets, whose investment firm reportedly had as much as $300 million with Madoff. "We are shocked at this revelation," said the university representative. "Bernard Madoff has tendered his resignation from all positions and involvement with the university. Our lawyers and accountants are investigating all aspects of his relationship to Yeshiva University." On the surface, Madoff's funds were supposed to be low-risk investments. His largest fund reported steady returns, usually gaining a percentage point or two a month. The funds' stated strategy was to buy large cap stocks and supplement those investments with related stockoption strategies. The combined investments were supposed to generate stable returns and also cap losses. But sometime in 2005, according to the SEC suit, Madoff's investment-advisory business morphed into a Ponzi scheme, taking new money from investors to pay off existing clients who wanted to cash out. According to a form filed with the SEC, Madoff reported that the business had $17.1 billion under management in January 2008. As the market got worse this year, Madoff continued to report to investors that his funds were up as much as 5.6% through the end of November. That would have been a remarkable performance. During the same time, the stocks of the Standard & Poor's 500, where Madoff supposedly did most of his trading, had dropped a weighted average of 37.7%. Despite his gains, a growing number of investors began asking Madoff for their money back. In the first week of December, according to the SEC suit, Madoff told a senior executive that there had been requests from clients for $7 billion in redemptions. On Wednesday, Madoff met with his two sons to tell them the advisory business was a fraud "a giant Ponzi scheme," he reportedly told them and was nearly bankrupt. The sons reportedly contacted their lawyer, who then alerted federal authorities to the fraud. Before being caught, Madoff was working on a scheme to dole out his funds' remaining $300 million to the firm's employees and his family members. Many who know Madoff say they are surprised by the revelations. "Many of the assets he took were from friends and family," says a former Tremont official. "It is almost inexplicable. Even the people I have talked to who have had long relationships with him are shell-shocked." http://www.time.com/time/business/article/0,8599,1866154,00.html Appendix D

Appendix E

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