An Empirical Test of the Agency Theory in Corporate Governance of SACCOs in Uganda

Abstract

In organizations, the principal (owners) hire agents (management) for the purpose of producing goods and services. Each party in a firm has a unique goal. For example, as the principal seeks to maximize dividends, agents cherish utility maximization from their status and claims for non-pecuniary benefits. While executing their roles and obligations, management may consider fulfilling their interests at the expense of the owners, and vice versa. Management misconduct results in agency problems. This study tests the relevance of the agency theory and examines whether existing corporate governance mechanisms address agency problems in Savings and Credit Cooperatives (SACCOs) in Uganda. Inquiry follows a mixed research (both quantitative and qualitative) design by use of self-administered questionnaires and personal interviews. The key informants are selected through a stratified sampling procedure. Questions are asked about the agency problems emanating from: the utility of owners and management, financial challenges, and information asymmetry; and governance mechanisms. Respondents’ views and perceptions are analyzed using a 5-point Likert scale. From a sample of 252 SACCOs, each with a minimum of ten years of experience, findings show that majority (40%) operate in Western Uganda, have a minimum of 1,000 shareholders, 65.1% of the Board has at least a first degree, and a dominance male (91.7%) in management. The average welfare index for the owners (4=bad welfare) is lower than that of the management (2.7=good welfare) signaling presence of conflicts. The board composition shows less CEO duality, bigger size, more independence, higher remuneration, and presence of audit committees. Examining whether this structure impacts on the agency conflicts, the marginal effects from the probit regression indicate that the board size, remuneration, and independence have a high likelihood of reducing the principal-agent problems while the audit committee yields a reverse sign. Therefore, there is need for the adoption of good corporate governance practices in SACCOs for survival.