A Study Of Principal-Agent Problem Of Public Family Business

Western traditional principal-agent theory is "one side" theory basing on public company in England and the United State of America, which mainly studies on the principal-agent problem between dispersedly outer investors and professional managers who have control rights. But, currently Chinese public family business facing two sides of principal-agent problem: besides the first side between the owner and managers, there is the second between dispersedly outer stockholders and controlling family. For the existence of family mangers and professional mangers, the first problem would be divided into two layers: the principal-agent relationship between the owner and family managers, and relationship between the owner and professional managers. Then, the most remarkable characteristic of Chinese public family business's corporation governance is "three layers of two sides" principal-agent problem. Among the problem, there are factors that have indefinite efforts on agent relationship and are neglected by western traditional principal-agent theory in different sense, including altruism, the authority of the owner and the pyramid-controlling structure etc. Then, it is impossible to analyze Chinese family business in virtue of western traditional principal-agent theory simply. In view of family business's real condition, it is necessary to extend western traditional principal-agent theory and build up the analyzing framework of "three layers of two sides" principal-agent problem, which should embrace above special factors.According to the relationship between controlling family and public company with its core capital, this paper divides 212 public family businesses in 2004 into founding family business (FFB) and no-founding family business (N-FFB). Under guidance of the assumption of "controlling family—three layers of two sides principal-agent problem—the value of the business ", the empirical study finds that though they are all belong to family business, each of them has a series of differences about the relationship among the finally proprietary rights, control rights and management rights, altruism, the authority of the owner and the pyramid-controlling structure, including other differences of organization and governance.The most important contribute of this paper is the finding that two kinds of family business face different agent conflicts: FFB mostly confronts the first side of problem—the conflict between the owner and managers inside business, even though the authority of owner can reduce the agent cost, the altruism between family members does not reduce the agent cost but aggravate the agent problem between the owner and family mangers; But there are no evidences indicate the systemic conflict between the controlling family and outer stockholders; however, N-FFB mostly confronts the second side of problem—the conflict between the controlling family and dispersedly outer shareholders. The controlling family invades and occupies the interest of outer stockholders through varieties "tunneling", which becomes worse but not in the stage of emergence, and this conflict is aggravating with the enlarging of the degree of deviation between the family's controlling rights and cash flow rights. Then, it is necessary to discriminate FFB from N-FFB in theory analyzing or making policy.Through the further studying on the first sides of problem, this paper finds there are "mixed governance" including family mangers and outer mangers in family business (especially FFB), and it is a kind of informal governance mechanism constructed by owner against his will under the conditions of the weaken of internally and externally formal mechanism which can't refrain managers from opportunism. Though hiring two types of different managers and exercising "discrimination" in them, owner can get the information-rent and reduce the agent cost.From the further studying on the second sides of problem, this paper also finds that though the pyramid-controlling structure can help the controlling family lower cost of controlling rights of the public business and offer facilities for it's invading outer stockholders' interest. But, there no enough evidence show that the controlling family only plunders outer stockholders' interest by constructing pyramid-controlling structure, including no-founding family. Pyramid-controlling structure is a neutral way of controlling rights, which could provide convenience to intrude the interest of the outer stockholders by tunneling public company, and also could provide convenience to support under certain condition. However, the latter can protect outer stockholders' interest objectively, and then pyramid-controlling structure can be regarded as a mechanism of insurance.Above findings help us to understand the big family businesses' governance structure and organization's behavior accurately, to form the proper orientation of public opinion and reasonable policy suggestion, and to foster better surroundings for Chinese family businesses' healthy development in the long term.