Principal-agent problems in publicly owned enterprises: The failure of the shareholder

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Abstract

The presence of principal-agent problems in publicly owned enterprises is highlighted by many scholars. Unfortunately, such problems are present in publicly owned enterprises (POEs) in Kosovo too. Capture, rent-seeking, moral hazard, information asymmetry, and adverse selection are some of the agency problems that POEs in Kosovo are facing, negatively impacting their performance and citizens’ welfare. Recently, one of the POEs that used to be the most profitable is on the verge of bankruptcy with bank accounts blocked. This paper aims to explore the relevance of principal-agent problems in the governance of publicly owned enterprises and the failure of the shareholder to play its role and pursue the best interest of POEs. The paper also questions the applicability of the principal-agent model in POEs when the shareholder fails to play its role as a principal by concluding that the lack of “real” principal in publicly owned enterprises undermines the applicability of principal-agent theory and there is a need to make the Government more responsible by taking some measures such as the inclusion of private sector as a shareholder. The paper concludes that the Government must act as a responsible shareholder and exercise its role properly while also raises the opportunity of the inclusion of the private sector as minority shareholders in POEs, which may help in increasing the responsibility of the shareholder in the oversight of the management of POEs. Conclusions of the paper may be relevant for further studies regarding the corporate governance and structure of publicly owned enterprises from the perspective of the agency theory and hence exploring possibilities of reducing principal-agent problems in POEs.

Keywords: Publicly Owned Enterprises, Agency Problems, Principal, Agent, Legal, Performance, Shareholder, Failure

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

Acknowledgements: This research was finalised during the visit of the author as a Fulbright scholar at the University of Iowa, Faculty of Law. The author thanks Fulbright and the University of Iowa for enabling the use of the library of the University of Iowa.

JEL Classification: H4, K2, P2

Received: 03.06.2021
Accepted: 06.09.2021
Published online: 08.09.2021

How to cite this paper: Zejnullahu, N. (2021). Principal-agent problems in publicly owned enterprises: The failure of the shareholder. Journal of Governance & Regulation, 10(4), 70–83. https://doi.org/10.22495/jgrv10i4art6