Principal-Principal Agency Problem and Shareholder Activism

Abstract

Drawing from the social movement perspective of corporate governance, we explore the underlying dynamics of agency conflict between controlling shareholders and minority shareholders, namely principal-principal agency problem. We argue that tunneling of resources from publicly traded firms to business group affiliates could be used as a device of minority shareholder expropriation and show how it is guided by motives of controlling families. In response, we explore how minority shareholder activism acts as a possible means through which minority shareholder accesses corporate governance in order to alleviate the principal-principal agency problem. Using rich related party transactions data of inter-firm purchases, sales, debts, and loans within Korean business groups, we examine how and why controlling shareholders in publicly traded firms wield their power over the firms and shift resources out from the firms to generate private benefit. We show how minority shareholder movement gained its presence in Korea and test the efficacy of minority shareholder activism in reducing related party transactions.