Linking The Agency Theory Perspective To Strategic Management, Part II

Competitive strategy
Firms may improve their competitive position through the use of Mergers and Acquisitions (M&As) and Strategic Alliances. M&As are a form of strategic renewal and the quickest and surest way to grow the firm. However, top manager compensation is linked more closely with firm size than firm performance and indeed there is evidence to show that the incomes of managers rise even with substantial subsequent declines in performance of acquiring companies (Fowler and Schmidt 1989; Firth, 1991). M&A may therefore ‘be undertaken by managers even if they do not promise profit and shareholder wealth increases’ (Mueller, 1995: 15). The traditional agency issue then is whether the acquiring manager is acting in shareholders’ best interests in entering into an M&A deal and negotiating the level of premium necessary to win.

Control
Agency relationships are not just limited to the interaction between owners of capital and top managers. The agency relationship extends in a hierarchy down through the firm, so that corporate managers are in a principal agent relationship with their workforce. Conventional views of agency, assume that corporate managers can control the behaviour of their agents within the firm and assumes that strategic control is sufficient to avoid misinformation and will ensure operational effectiveness. Strategic control, or focus upon the means and methods on which the firm depends, is seen as underwriting operational control, which is determining and monitoring how the workforce behave and perform in production or service provision. Generally a strong hierarchy with clearly defined reporting relationships is the traditional way in which top managers achieve operational control. However, the assumption that the agency relationship is unproblematic, is dangerous.

Corporate dysfunction is endemic as subordinates strive for autonomy and control is lost. Agency theory helps to show that subordinates will act in ways to improve their benefits, by reinterpreting orders flowing downwards, and presenting information flowing upwards in a positive light. This potential agency problem can be termed a ‘double agency problem’ and it is present in all forms of organization that are of a scale to create personal and often physical distance between top managers and agents. The implications for strategy may be perceived in the way firms struggled to manage the complexities of their vast organizations after the wave of diversifying acquisitions which took place during the 1970s-1980s.

Sumber:
Jenkins, M., Ambrosini, V., & Collier, N. (2016). Advanced Strategic Management. New York: Palgrave.