Principal–principal conflicts: An exploratory study in privatized companies in an Asian emerging economy

• Published date: 01 November 2022
• Author: Ljiljana Eraković,Trang Thi Thu Tran,Christina Stringer
• Date: 01 November 2022
• DOI: http://doi.org/10.1111/corg.12415

SPECIAL ISSUE ARTICLE

Principal–principal conflicts: An exploratory study in privatized

companies in an Asian emerging economy

Ljiljana Erakovi

c

1

| Trang Thi Thu Tran

1,2

| Christina Stringer

1

1

Department of Management and

International Business, The University of

Auckland, Auckland, New Zealand

2

Faculty of Economics, Ho Chi Minh City

University of Economics and Finance, Ho Chi

Minh City, Vietnam

Correspondence

Ljiljana Erakovi

c, Department of Management

and International Business, The University of

Auckland, Private Bag 92019, Auckland,

New Zealand.

Email: l.erakovic@auckland.ac.nz

Abstract

Research Question/Issue: This study examines the phenomenon of principal–

principal conflicts in privatized companies in Vietnam. Since different types of share-

holders may have competing interests, our study aims to address the following

question: “How do different types of shareholders affect principal–principal conflicts

in privatized companies in Asian emerging economies?”

Research Findings/Insights: Through a qualitative study, including 31 semistructured

interviews with various governance actors from 14 privatized companies in Vietnam,

we identify four types of principal–principal conflicts: (a) state controlling owners

versus nonstate owners, (b) manager-owners and affiliated strategic investors versus

employee-owners, (c) multiple opportunistic strategic investors versus minority

employee-owners, and (d) hibernating strategic investors versus other inside owners.

Theoretical/Academic Implications: Our study contributes to the extant research on

principal–principal conflicts in emerging economies. We advance the debate on the

complexity of relationships between inside and outside shareholders. Our findings

demonstrate that an understanding of controlling and minority shareholders and

institutional conditions provides a more fine-grained understanding of the complexity

of principal–principal conflicts.

Practitioner/Policy Implications: Our findings offer insights into how different types

of shareholders seek to advance their own interests. This, in turn, can lead to them

misinterpreting legal requirements. Thus, policymakers should consider different

types of strategic investors and their strategic intent in the privatization process.

KEYWORDS

corporate governance, Asian emerging economy, principal–principal conflict, privatized

company, Vietnam

1|INTRODUCTION

Principal–principal conflicts, which refer to conflicts between different

classes of shareholders, are considered one of the most prevalent cor-

porate governance issues in emerging economies (Su et al., 2008;

Young et al., 2008). In this context, tensions between different princi-

pals originate from ownership distribution when ownership is

concentrated in the hands of a small number of shareholders

(blockholders or majority shareholders) (Ahmadjian, 2014). Concen-

trated ownership causes two major types of principal–principal

conflicts—between major blockholders and between blockholders and

minority shareholders. Conflicts between principals are directly

related to the control rights over the company's direction and impor-

tant decisions (Russino et al., 2019). Blockholders are usually

Received: 30 November 2020 Revised: 11 October 2021 Accepted: 19 October 2021

DOI: 10.1111/corg.12415

Corp Govern Int Rev. 2022;30:713–737. wileyonlinelibrary.com/journal/corg © 2021 John Wiley & Sons Ltd 713

controlling shareholders, and they can exercise control by appointing

affiliated individuals to managerial positions (Dharwadkar et al., 2000;

Schulze et al., 2001) and pursue their own interest at the expense of

that of the company (Young et al., 2008).

Although the literature provides significant evidence of principal–

principal conflicts in developing countries, there is less research on

how and why dominant shareholders implement their control. The lit-

erature has generally assumed that the opportunistic behavior of

dominant controlling shareholders derives from the pursuit of their

interests (Young et al., 2008; Zhao, 2016). However, two important

aspects of control in this context have not received much attention.

The first aspect refers to the actions of other shareholders (including

other blockholders and minority shareholders) that might enable con-

trolling shareholders to engage in such transactions. For instance,

minority shareholders' active or inactive behavior may prevent or

allow controlling shareholders' opportunistic actions. The second

aspect refers to internal relationships between various shareholders.

The literature on principal–principal conflicts assumes that controlling

shareholders and minority shareholders is in an adverse relationship

because of their conflicting interests (Young et al., 2008). However,

some authors have developed theoretical models (Bennedsen &

Wolfenzon, 2000; Charléty et al., 2019; Sauerwald & Peng, 2013) and

conducted empirical studies (Russino et al., 2019; Wang, 2017) show-

ing how different types of shareholders can form forced or voluntary

coalitions to obtain control and influence corporate strategy. Yet, both

empirical studies on this topic considered developed countries,

Italy and the United States. In this context, formal institutions and

the protection of outside investors work efficiently, and the state

has no role in governing business entities. This scenario contrasts

with that in Asian emerging economies. Together, these two aspects—

shareholders' behavior and dynamic relationships among various

categories of shareholders—create a potentially fruitful research

ground to further the understanding of principal–principal conflicts in

Asian emerging economies.

The context in which we study shareholders' behavior and rela-

tionships is privatized companies in Vietnam. In general, privatized

companies tend to be acquired by foreign corporations, local compa-

nies, individual investors, top management, and/or employees

(Claessens et al., 2000; Dharwadkar et al., 2000). However, in emerg-

ing economies, the state remains an important (and often dominant)

shareholder of a company's assets in the initial post-privatization

years (Boubakri et al., 2005). We believe that the Vietnamese context

can yield new insights into the role of the state and strategic investors

in companies transitioning from state-owned enterprises (SOEs) to

privately owned firms. Moreover, multiple shareholders form several

classes of principals, each with different interests and incentives

regarding privatized companies. How, then, do different types of

shareholders affect principal–principal conflicts in privatized compa-

nies in Asian emerging economies?

We attempt to answer our research question through a qualita-

tive inductive study in Vietnamese privatized companies by con-

ducting in-depth interviews with board members, executive officers

and government officials. By triangulating data from interviews,

organizational documents and publicly available information about the

companies, we discover major governance relationships among vari-

ous classes of principals and the key conditions of principal–principal

conflicts. Adopting a qualitative research approach enables us to get

closer to real governance actors and shed light on principal–principal

conflicts at a fine-grained level. Scholars such as McNulty and

Pettigrew (1999) and Roberts et al. (2005) have been instrumental in

promoting qualitative research methods in corporate governance

studies. McNulty et al. (2013), in a special issue of Corporate

Governance: An International Review, called for more studies with

first-hand accounts to ensure that corporate governance phenomena

are explored deeply by uncovering the substance of governance,

not just its appearance. We believe that our findings drawn from a

not-often-explored governance context (Bansal, 2013) provide new

insights into existing knowledge on principal–principal conflicts.

The remainder of the paper is structured as follows. In Second

2, we identify four elements that underlie principal–principal conflicts

in Asian emerging economies. We then briefly introduce the institu-

tional environment of Vietnam in Section 3before describing our

methods Section 4. In Section 5, we present the main findings of the

study. We conclude the paper in Section 6by focusing on the contri-

butions of this study to the literature on principal–principal conflicts

in emerging economies.

2|PRINCIPAL–PRINCIPAL CONFLICTS IN

ASIAN EMERGING ECONOMIES

Over the past decade, increased research emphasis has been placed

on the complexity of shareholder relationships in emerging econo-

mies. This literature distinguishes four primary factors underlying

principal–principal conflicts in this context: a tight link between con-

centrated ownership and control, a state-controlled shareholder sys-

tem, weak corporate governance regimes and strong informal

institutions. Here, we specifically focus on research referring to

emerging market economies in Asia.

The first factor, a tight link between concentrated ownership and

control, is a common feature of emerging economies

(Ahmadjian, 2014; Young et al., 2008). Concentrated ownership struc-

tures create fascinating and complex dynamics in the relationship

between ownership and control or between different classes of share-

holders (principals). In general, shareholders can exercise control

through their cash-flow rights and voting rights. Shareholders with a

significant stake in the company (cash-flow rights) can exert control

through sheer ownership (Villalonga, 2009). In their analysis of privati-

zation and agency problems in emerging economies, Dharwadkar

et al. (2000) discussed a type of ownership structure in which equity

may be concentrated in the hands of a dominant, majority (greater

than 50% equity) owner (who possesses equity controlling rights) and

several other smaller blockholders, who hold a portion of the

remaining equity. The dominant shareholder may have objectives and

interests that differ from those of blockholders and other minority

shareholders. Owing to its ownership position, a dominant

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