Does digitalization mitigate or intensify the principal-agent conflict in a firm?

Abstract

In this article, we analyse the impact of business digitalisation on the principal-agent conflict. While there are several studies of impact of digitalization on corporate governance, the empirical evidence has so far been relatively scarce. We examine the principal-agent conflict from several angles: the number of shareholder-sponsored proposals submitted for the shareholder meetingsб the level of support for management-sponsored proposals and the frequency of proxy contests. As a proxy for the active digitalisation of a firm, we use the blockchain technology that has the potential to fundamentally change the distribution of power within an organisation, potentially mitigating the principal-agent conflict. We analyze a sample of 2813 NYSE, Nasdaq and AMEX-traded firms for the year 2018, during which rapid blockchain adoption was exhibited. Our results suggest that firms active in business digitalisation overall have a lower level of principal-agent conflict. We find that such firms generally have shareholders that are more active, which indicates an environment less prone to the principal-agent conflict. While on average, proposals submitted by the management receive less support during voting, the share of approved proposals does not change for the digitising firms. Proxy contests appear relatively rare among the firms active in digitalisation, however, there is not yet enough data to confirm this.

Appendices

Appendix 1: Variables used in the research

Variable	Description
blockchain_weak	Dummy variable equal to 1 if a company has any public association with blockchain technology, such as a comment by the firm’s executive or a published report on the topic and 0 otherwise [Source: open sources, internet search]
blockchain_stronSOg	Dummy variable equal to 1 if a company has a confirmed blockchain initiative, such as participation in a consortium or development of a in-house blockchain solution [Source: open sources, internet search]
sh_prop	Dummy variable equal to 1 if a company received at least one shareholder-sponsored proposal for the annual meeting [source: ISS voting database]
N_sh_prop	Number of shareholder-sponsored proposals received by a firm for the annual meeting [source: ISS voting database]
level_of_support_total	Average % of votes in favor of all proposals for the meeting [source: ISS voting database]
level_of_support_mgmt	Average % of votes in favor of all management-sponsored proposals for the meeting [source: ISS voting database]
level_passed_total	% of passed proposals at the meeting [source: ISS voting database]
level_passed_mgmt	% of passed management-sponsored proposals at the meeting [source: ISS voting database]
size_lnmarcap	Natural logarithm of the company’s market capitalisation [Source: CapitalIQ]
growth_revenue	Compound annual growth rate of revenues for 3 years prior to the meeting[Source: CapitalIQ]
EBITDA_margin	Company’s EBITDA divided by the company’s revenues [Source: CapitalIQ
market_book	Ratio of company’s market capitalisation to the company’s book value of equity [Source: CapitalIQ]
leverage	Ratio of company’s total debt to the total book value of equity [Source: CapitalIQ]
Institutions	Fraction of company’s shares owned by institutions [Source: CapitalIQ]
Insiders	Fraction of company’s shares owned by company’s insiders [Source: CapitalIQ]
Sector dummies	Set of variables identifying the main sector of operations for a firm (Energy, Materials, Industrials, Consumer discretionary, Consumer staples, Healthcare, Financials, IT, Communication services, Utilities, Real Estate) as reported in CapitalIQ database [Source: CapitalIQ]

Appendix 2: Descriptive statistics: Blockchain adopters vs non-adopters

Statistic	N	Mean	St. Dev	Min	Pctl(25)	Pctl(75)	Max
Descriptive statistics for blockchain adopters (Strong form of definition)
sh_prop	258	0.3	0.5	0	0	1	1
level_of_support_mgmt	258	0.6	0.2	0.1	0.5	0.9	1.0
proxy_contest	258	0.004	0.1	0	0	0	1
blockchain_weak	258	1.0	0.0	1	1	1	1
level_of_support_total	258	0.6	0.2	0.2	0.5	0.8	1.0
N_sh_prop	258	0.7	1.3	0	0	1	7
level_passed_total	258	0.9	0.1	0	0.9	1	1
level_passed_mgmt	258	1.0	0.1	0	1	1	1
blockchain_strong	258	1.0	0.0	1	1	1	1
size_lnmarcap	258	8.9	2.5	1.4	7.5	10.7	13.6
growth_revenue	258	0.1	0.3	− 0.8	0.02	0.1	3.3
EBITDA_margin	258	0.2	0.2	− 0.6	0.04	0.3	1.0
market_book	258	5.1	11.6	− 30.8	1.4	5.5	111.1
leverage	258	1.2	3.3	− 12.1	0.3	1.5	33.3
Institutions	258	0.7	0.3	0.000	0.6	0.9	1.2
Insiders	258	0.1	0.1	0.0	0.003	0.1	0.6
ROA	258	0.1	0.1	− 0.4	0.02	0.1	0.7
marcap	258	48.1	101.3	0.004	1.8	45.1	832.6
sector_id	258	6.3	2.2	1	4	8	11
sector_energy	258	0.03	0.2	0	0	0	1
sector_materials	258	0.01	0.1	0	0	0	1
sector_industrials	258	0.1	0.4	0	0	0	1
sector_cons_discr	258	0.1	0.3	0	0	0	1
sector_cons_stapl	258	0.1	0.2	0	0	0	1
sector_healthcare	258	0.1	0.3	0	0	0	1
sector_finance	258	0.2	0.4	0	0	0	1
sector_IT	258	0.3	0.4	0	0	1	1
sector_communication	258	0.1	0.3	0	0	0	1
sector_utilities	258	0.02	0.1	0	0	0	1
Descriptive statistics for blockchain adopters (Weak form of definition)
sh_prop	412	0.3	0.4	0	0	1	1
level_of_support_mgmt	412	0.7	0.2	0.1	0.5	0.9	1.0
proxy_contest	412	0.005	0.1	0	0	0	1
blockchain_weak	412	1.0	0.0	1	1	1	1
level_of_support_total	412	0.7	0.2	0.1	0.5	0.9	1.0
N_sh_prop	412	0.5	1.2	0	0	1	8
level_passed_total	412	0.9	0.1	0	0.9	1	1
level_passed_mgmt	412	1.0	0.1	0	1	1	1
blockchain_strong	412	0.6	0.5	0	0	1	1
size_lnmarcap	412	8.7	2.3	1.4	7.5	10.2	13.6
growth_revenue	412	0.1	0.2	− 0.8	0.03	0.1	3.3
EBITDA_margin	412	0.1	0.2	− 0.9	0.02	0.2	1.0
market_book	412	5.9	26.8	− 30.8	1.4	4.9	508.5
leverage	412	1.1	3.2	− 12.1	0.2	1.4	33.8
Institutions	412	0.7	0.3	0.000	0.6	0.9	1.2
Insiders	412	0.1	0.1	0.0	0.004	0.1	0.7
ROA	412	0.1	0.1	− 0.4	0.02	0.1	0.7
marcap	412	36.4	83.7	0.004	1.8	28.1	832.6
sector_id	412	6.3	2.3	1	4	8	11
sector_energy	412	0.03	0.2	0	0	0	1
sector_materials	412	0.01	0.1	0	0	0	1
sector_industrials	412	0.2	0.4	0	0	0	1
sector_cons_discr	412	0.1	0.2	0	0	0	1
sector_cons_stapl	412	0.1	0.2	0	0	0	1
sector_healthcare	412	0.1	0.2	0	0	0	1
sector_finance	412	0.2	0.4	0	0	0	1
sector_IT	412	0.3	0.5	0	0	1	1
sector_communication	412	0.1	0.3	0	0	0	1
sector_utilities	412	0.02	0.1	0	0	0	1
Descriptive statistics for blockchain non-adopters
sh_prop	2,401	0.1	0.3	0	0	0	1
level_of_support_mgmt	2,401	0.8	0.2	0.1	0.7	0.9	1.0
proxy_contest	2,401	0.01	0.1	0	0	0	1
blockchain_weak	2,401	0.0	0.0	0	0	0	0
level_of_support_total	2,401	0.8	0.2	0.1	0.6	0.9	1.0
N_sh_prop	2,401	0.1	0.7	0	0	0	14
level_passed_total	2,401	1.0	0.1	0	1	1	1
level_passed_mgmt	2,401	1.0	0.1	0	1	1	1
blockchain_strong	2,401	0.0	0.0	0	0	0	0
size_lnmarcap	2,401	6.9	1.9	0.8	5.6	8.2	13.7
growth_revenue	2,401	0.1	0.3	− 3.1	0.02	0.2	5.7
EBITDA_margin	2,401	0.1	0.2	− 1.0	0.0	0.2	1.4
market_book	2,401	3.3	10.5	− 92.4	1.2	3.5	286.6
leverage	2,401	0.9	5.1	− 45	0.1	1.1	124
Institutions	2,401	0.7	0.3	0.0	0.4	0.9	1.4
Insiders	2,401	0.1	0.1	0.0	0.01	0.1	1.4
ROA	2,401	0.1	0.1	− 2.1	0.0	0.1	1.7
marcap	2,401	5.1	22.2	0.002	0.3	3.8	928.2
sector_id	2,401	5.6	2.6	1	3	7	11
sector_energy	2,401	0.1	0.3	0	0	0	1
sector_materials	2,401	0.04	0.2	0	0	0	1
sector_industrials	2,401	0.2	0.4	0	0	0	1
sector_cons_discr	2,401	0.1	0.3	0	0	0	1
sector_cons_stapl	2,401	0.04	0.2	0	0	0	1
sector_healthcare	2,401	0.1	0.3	0	0	0	1
sector_finance	2,401	0.2	0.4	0	0	0	1
sector_IT	2,401	0.1	0.3	0	0	0	1
sector_communication	2,401	0.04	0.2	0	0	0	1
sector_unilities	2,401	0.02	0.2	0	0	0	1