Influence of Ownership Type and CEO Power on Residual Loss: Evidence From the Global Microfinance Industry

Abstract

This study examines whether the agency cost component referred to as “residual loss” differs between nonprofit and shareholder-owned microfinance organizations and whether such costs are further influenced by CEO power. We use operating expenses, asset utilization, liquidity, and tangible asset intensity to proxy for residual loss. Using 374 microfinance organizations located in 76 countries, we find evidence that the residual loss is higher in microfinance organizations incorporated as nonprofits, but only if the CEO is powerful. Our empirical evidence illustrates the importance of installing proper governance mechanisms to minimize costs caused by high managerial power in the nonprofit sector. When CEOs are not powerful, nonprofits appear to have lower residual loss than for-profit organizations do, consistent with a motivated agent perspective. An important message of our study is that traditional agency theory perspectives might be ill-suited to analyze residual loss as a function of the nonprofit versus for-profit organizational form.

The Perceived Differences: The Sector Stereotype of Social Service Providers

“…Nonprofit organizations play distinct economic roles in social service markets (Hansmann, 1980). Theoretically, the "nonprofitness" not only diverse organizational behaviors of providers in certain social service market (e.g., Amirkhanyan et al, 2008;Beisland et al, 2019;Paul et al, 2020); it also evokes ideological reactions and public 1 Seattle University, WA, USA perceptions that determine the social service provider's success in an ecological system in which nonprofits, for-profits, and public agencies compete (DiMaggio & Anheier, 1990). However, arguably, boundaries between the nonprofit and for-profit sector in social services have become increasingly blurred.…”

The power‐structure model of non‐profit governance

“…CEO duality is common in a type of hybrid organization known as a microfinance organization (Beisland et al, 2019). These organizations have a social goal of reducing poverty by offering microloans and other services to lower‐income families and entrepreneurs, while at the same time seeking to ensure financial accountability (Beisland et al, 2019; Hudon & Meyer, 2016). Research by Beisland et al (2019) reveals that residual loss (i.e., the loss associated by management using resources for personal gain) is higher in organizations with CEO duality.…”

“…These organizations have a social goal of reducing poverty by offering microloans and other services to lower‐income families and entrepreneurs, while at the same time seeking to ensure financial accountability (Beisland et al, 2019; Hudon & Meyer, 2016). Research by Beisland et al (2019) reveals that residual loss (i.e., the loss associated by management using resources for personal gain) is higher in organizations with CEO duality. Having CEOs chair the board augments the model presented in this paper because it offers CEOs legitimate power over the board, thereby undermining the power of the board and bolstering the power of the CEO.…”

“…Having a CEO as the chair of the board blurs the boundary between management and the board, thereby changing the structure of power. CEO duality is common in a type of hybrid organization known as a microfinance organization (Beisland et al, 2019). These organizations have a social goal of reducing poverty by offering microloans and other services to lower-income families and entrepreneurs, while at the same time seeking to ensure financial accountability (Beisland et al, 2019;Hudon & Meyer, 2016) In many hybrid organizations, a founder-CEO also operates as an entrepreneur-CEO.…”

“…CEO duality is common in a type of hybrid organization known as a microfinance organization (Beisland et al, 2019). These organizations have a social goal of reducing poverty by offering microloans and other services to lower-income families and entrepreneurs, while at the same time seeking to ensure financial accountability (Beisland et al, 2019;Hudon & Meyer, 2016) In many hybrid organizations, a founder-CEO also operates as an entrepreneur-CEO. Entrepreneur-CEOs usually require less monitoring by boards because they are mission-driven agents with a high motivation to succeed (Besley & Ghatak, 2005;Randøy & Goel, 2003).…”