Published by Nonprofit and Voluntary Sector Quarterly; May 2019; 40 pages; available at: https://www.researchgate.net/publication/333175215_Influence_of_Ownership_Type_and_CEO_Power_on_Residual_Loss_Evidence_From_the_Global_Microfinance_Industry
Based on data from 374 microfinance institutions in 76 countries, the authors seek to identify “whether the agency cost component referred to as ‘residual loss’ differs between non-profit and shareholder-owned microfinance organizations and whether such costs are further influenced by CEO power.” Michael Jensen and William Meckling define agency costs as comprising the following: monitoring expenses, bonding expenses and residual loss. Of these components, Dr Beisland et al focus on residual loss, which they define as “loss associated with management diverting resources for personal gain (for example, consuming a perquisite excessively or overstaffing to secure an ‘easier life’ for the CEO) that would otherwise have been used to grow the firm or been distributed to its owners as dividends.”
Through an empirical analysis, the authors conclude that residual loss is higher in nonprofit microfinance organizations relative to shareholder-owned microfinance organizations when the CEO has higher levels of power to act on her or his own. Conversely, when CEOs are subject to stronger oversight, the authors find that nonprofit microfinance organizations experience lower residual losses than do shareholder-owned organizations.
As a result, the authors emphasise the importance of governance mechanisms that “minimize costs caused by high managerial power in the nonprofit sector,” such as controls to monitor behaviour.
By Jolene Khor, Research Associate
Sources and Additional Resources
“Influence of Ownership Type and CEO Power on Residual Loss: Evidence From
the Global Microfinance Industry” by Leif Atle Beisland, Daudi Pascal Ndaki and Roy Mersland
https://www.researchgate.net/publication/333175215_Influence_of_Ownership_Type_and_CEO_Power_on_Residual_Loss_Evidence_From_the_Global_Microfinance_Industry
“Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure” by Michael Jensen and William Meckling
https://doi.org/10.1016/0304-405X(76)90026-X
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