An Investigation into the Constructive Role of Task-based Conflict within the Agency Theory

Abstract

This thesis focuses on the agency relationship by observing the conflict's role within the principal-agent dyad. It specifically sets the focal point on one specific type of conflict, i.e., task conflict, and concentrated on corporate governance and the mutual interactions of corporate components as the main field of study. The role of conflict has been discussed under the agency theory (Amason and Schweiger, 1994; Jensen and Meckling, 1976; Smith, 2010), asserting that any conflict between management and the owner inflicts unwanted costs upon the organization, and as a result, leads to unsatisfactory conditions (Mirrlees, 1976). Nevertheless, the psychological studies and the experiments conducted regarding organizational behavior indicate that disagreement tends to positively affect collective performance (Jehn, 1995; Rahim, 2002; Shankman, 1999). The current dissertation tried to bridge the theory and practice of studying the conflict-of-interest in the principal-agent relationship. Furthermore, it demonstrated that the effect of conflict resolution can vary depending on the type of controversy, task type, and even the firm's industrial background. The current dissertation adopted the mathematical model from Holmstrom (1979) for the theory and developed it by adding the conflict clarification task. Theoretical findings indicate that conflict clarification efforts positively influence the total outcome under the new assumptions. Also, it suggests that in a company with high innovation potential, the principal's share of the outcome is higher when there is observable conflict clarification activity. The relationship between the management board and the shareholders is investigated in the practical setting. By employing a dataset collected from over 134 S&P 500 in 14 years, it was examined whether shareholders' activism positively affects the performance indicators of the firm. The results suggest a positive and significant effect of executive compensation (i.e., 11%) and corporate governance (i.e., 8%) proposals. Also, one extra executive compensation proposal is associated with 13% higher revenue.