Agency Problem in Share Companies in Ethiopia: The Law and the Practice
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Date
2019-01
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Addis Ababa University
Abstract
Agency theory is a popular theory of corporate governance. It contends that in companies
with a dispersed ownership structure, there is a separation of ownership and control as the
ownership over the assets of the company rests on the shareholders while the managers have
control over the assets. This creates a principal-agent relationship between the shareholders
and the management. Inherent in any principal-agent relationship is the understanding that
the agent will act for and on behalf of the principal. However, agency problem may also arise
due to the conflict of interest between the shareholders and the management. In view of this,
effective corporate governance mechanisms are imperative in order to prevent or reduce the
misappropriation of the shareholders’ investment by the managers.
Accordingly, this study is concerned with agency problem between shareholders and
management in share companies in Ethiopia. In particular, it submits empirical evidence on
the ownership structure of share companies in Ethiopia to show that there is dispersed
ownership structure and thus a serious agency problem. In support of this claim, it raises few
practical instances of agency conflict witnessed in share companies in Ethiopia and presents
the results of interviews conducted. More importantly, the study tries to identify some of the
most effective corporate governance mechanisms used to alleviate agency conflicts. Then, it
evaluates whether the law and the practice in share companies in Ethiopia adequately
incorporates these mechanisms, and finds that there are loopholes in the law as well as the
practice. Finally, the study calls for proper legal and institutional reform to be made to
address the problem
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Keywords
corporate governance,ownership structure, separation of ownership and control