Governing the corporation in emerging economies: a principal-principal perspective

A principal-agent perspective dominates corporate governance research. This perspective focuses primarily on the modern corporation in developed economies with widespread ownership and no controlling shareholders. We argue that a principal-agent perspective may have limited application in emerging economies, because most corporations in these countries are controlled by a family or the state with concentrated ownership. As a result, there is more potential for conflict between majority shareholders (principals) and minority shareholders (principals) than there is between shareholders (principals) and managers (agents). We term this variant of corporate governance problem the "principal-principal" problem, and draw on institutional theory, which focuses on the formal and informal constraints giving rise to this problem, to explore its underlying root causes. Overall, we suggest that a principal-principal perspective is a more fruitful approach to corporate governance in emerging economies, because prescriptions derived from the standard principal-agent model may be ineffective or may even exacerbate governance problems in these settings.