Agency Costs and Performance of UK Universities
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Agency Costs and Performance of UK Universities Mudassar Mehmood 1 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This research aims to investigate the level of agency costs faced by the universities in the UK, and how these costs impact the performance of these universities. A sample of 118 government-funded universities has been selected to collect financial data regarding various proxies of agency costs and quality of education. The research has utilised a multivariate regression model and t-tests to study the impact of agency costs on the quality of education in the UK universities. The results costs indicate that the UK universities suffer from extremely high level of agency costs however, the impact of these costs on the performance of these universities is contrary to their impacts on performance of the organisations in other sectors, that is, these costs positively contribute to the quality of education in these universities. Keywords Agency problem . Agency costs . Quality of education JEL Classifications I22 . G30
Introduction Jensen and Meckling (1976) proposed that commercial organisations suffer from agency costs that result from conflict of interests between management and shareholders mainly due to the separation of roles between them. However, such a separation of roles also exists in non-profit and public sector organisations. Steinberg (1990) and Van Puyvelde et al. (2012) established that this separation of roles creates agency costs in non-profit, charity and public sector organisations; however, the nature of agency costs in charity or non-profit organisations are different from those of commercial organisations. For example, in public sector organisations, the principal is the government of a country rather than individual shareholders, and governments typically have far higher powers than the shareholders and have different expectations from the
* Mudassar Mehmood [email protected]
1
Nelson College London, London, UK
Mehmood M.
management of an organisation. Moreover, principals in non-profit organisations are less motivated to exercise their control in order to discipline management due to the absence of personal incentives. Furthermore, in non-profit and charity organisations, the performance of management is linked to subjective criteria such as public welfare which, unlike financial performance, is difficult to measure. The UK universities that are funded by the government and are recognised as nonprofit organisations serving UK households (ONS.gov.uk, 2017). Being non-profit organisations, their management are expected and required to maximise public utility, that is, the provision of quality education to the general public rather the maximisation of shareholder’s wealth. There is also a separation of roles between the management and principals in these universities which inevitably leads to the creation of agency costs. The presence of agency costs requires the principals to use various bonding and monitoring mechanisms to align management
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