Agency costs: An analysis of the impact of corporate governance on the performance of public sector entities in Zimbabwe

Abstract

The impact of corporate governance on organisational performance is an area that has long been debated by behavioural scientists, legal practitioners, financiers, economists, and business operators. However, there seems to be no agreement over what constitutes an effective corporate governance mechanism that aligns agents’ or managers’ interests with those of principals (owners/ shareholders). This research examines the role of corporate governance in mitigating agency cost (thereby promoting firm performance) in a sample of thirty six public sector companies in Zimbabwe selected on the basis that all required information is available and the organisations are the biggest in the sector in terms of market capitalisation. It is suggested that observance of corporate governance can lower agency costs resulting in higher firm performance. This research uses the asset utilisation ratio (dependent variable) as a proxy to measure agency cost. Multivariate fixed effect regression is used to analyse the findings. The independent variables are the potential determinants of agency costs which are categorised as representing ownership influences and corporate governance mechanisms (director ownership, institutional ownership, external ownership, board size, CEO-chair duality, board independence and board remuneration). The research findings reveal that asset utilisation has a positive association with board independence and board remuneration. There is also a positive relationship between director ownership and CEO-Chair duality while institutional and external ownership was rare within the public sector in Zimbabwe. Additionally, institutional ownership was found to be negatively related to director ownership while the later also has no influence on asset utilisation ratio. There is also a negative association between asset utilisation ratio and CEO-Chair duality while board remuneration and board independence positively influences performance. The research findings thus reveal that more director and institutional ownership lessens agency costs. Moreover, small boards lower agency cost. Furthermore, segregation of the CEO and chairperson positions and higher remuneration lowers agency costs. However, from multivariate linear regression analysis, company specific fixed effects are also highly significant, implying considerable firm heterogeneity across sample firms. Moreover, 39% of variation in agency costs is explained by independent variables of corporate governance mechanisms while 61% is left to be explained by other factors implying corporate governance remains critical but certainly not the sole driver for agency costs and performance in public sector entities in Zimbabwe. Basing on results from this research, a number of recommendations to improve corporate governance and thus firm viii performance by reducing the agency problem within the public sector in Zimbabwe were herein suggested.