The Impact of Agency Theory on Corporate Governance in Emerging Markets: A Comprehensive Review

Abstract

Abstract: This article examines the impact of agency theory on corporate governance practices in emerging markets, highlighting the unique challenges these markets face in aligning the interests of managers and shareholders. Using a narrative review approach and descriptive analysis, the study synthesizes insights from existing literature to explore how agency theory is applied in regions characterized by concentrated ownership, weak regulatory frameworks, and political interference. The review focuses on the role of agency theory in shaping board structures, executive compensation, shareholder rights, and regulatory environments, comparing governance practices between emerging and developed markets. It also addresses the limitations of agency theory in these regions due to cultural, institutional, and legal differences, and explores alternative governance theories such as stakeholder and stewardship theories. The findings reveal that while agency theory remains a valuable tool for improving corporate governance, its application in emerging markets often requires adaptation to account for local conditions. For instance, concentrated ownership and family control frequently undermine the effectiveness of independent boards and performance-based incentives. Moreover, weak shareholder protections and limited transparency exacerbate the principal-agent problem, making it difficult to implement the governance reforms that agency theory advocates. Despite these challenges, case studies from countries like India and South Africa demonstrate the potential for governance improvements when agency theory principles are applied in conjunction with regulatory reforms. The study concludes that while agency theory will continue to play a key role in shaping corporate governance in emerging markets, future research and policy should focus on adapting these principles to the unique characteristics of these economies, considering alternative governance frameworks that address the broader needs of stakeholders.