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CONTRACT AND AGENT THEORIES: PRACTICAL USE IN HELSINKI GREATER

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 Estonian Business School

Department of Management

CONTRACT AND AGENT THEORIES: PRACTICAL

USE IN HELSINKI GREATER ECONOMIC AREA

Master’s thesis

Ville Kartaslammi

Supervisor: Mari Kooskora, Associate Professor, PhD.

Consultant: Tiit Elenurm, Professor, PhD.

Helsinki 2018
I herewith declare that I have written the Master’s thesis independently. References
have been indicated for all the publications, claims, opinions and different sources by
other authors.

May 22, 2018 ……………………………………………./V. Kartaslammi/

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 ACKNOWLEDGEMENTS

I would like to thank all people, who were close to me during the writing process of my
master’s thesis. Writing this master’s thesis has been very rewarding and given me lots
of academic skills to continue further, even to doctoral level in future. I would also like
to give a big thanks to my thesis supervisor associate professor Dr. Mari Kooskora, who
made accurate observations about my work and gave me good tips about the topic, what
I should focus on. Thank you also to my consultant professor and Dr. Tiit Elenurm, who
made specific suggestion, what topics should be taken to consider in this master thesis.
Thank you also to my family, who have supported me during the writing process.

EPIGRAPH

Making this master’s thesis was based on authors own interest of corporate governance
issues. The recent Nobel prize in economics 2016 awarded by Bengt Holmström and
Oliver Hart has inspired me to review and research principal-agent and contract theory
issues related to corporate governance practices.

I would truly like to benefit the Helsinki Chamber of Commerce member companies
with my thesis. The results, i.e. the empirical part, is the most important because the
author could offer some valuable insights to Helsinki Chamber of Commerce member
companies. The author wishes that the thesis will also inspire others to do research
which will benefit local business areas in practical ways. In the writer’s opinion, there
is no sense in writing only about theoretical aspects and issues, if it is not applied to
practical level.

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 TABLE OF CONTENTS
LIST OF FIGURES ....................................................................................................... 6

ABSTRACT ................................................................................................................... 7

INTRODUCTION ......................................................................................................... 8

1. REVIEW OF LITERATURE .................................................................................. 10

1.1 Principal-agent theory ............................................................................................ 10

1.2 CEO’s duality......................................................................................................... 12

1.3 Other agent relationships ....................................................................................... 15

1.4 Applying game theory............................................................................................ 17

1.5 Contract theory....................................................................................................... 18

1.6 Summary ................................................................................................................ 21

2. MATERIALS AND METHODS ............................................................................. 22

2.1 Research design ..................................................................................................... 22

2.2 Data collection and analysis ................................................................................... 23

2.2.1 Qualitative interview ........................................................................................... 24

2.2.2 Quantitative questionnaire .................................................................................. 24

2.3 Ethics of research ................................................................................................... 25

2.4 Finnish model of corporate governance ................................................................. 27

2.5 Research Bias ......................................................................................................... 30

3. RESULTS AND DISCUSSION .............................................................................. 32

3.1 Introduction to the interviews ................................................................................ 32

3.2 Interview with Philip Aminoff ............................................................................... 33

3.3 Interview with Jorma Eloranta ............................................................................... 35

3.4 Multiple-choice questionnaire answers .................................................................. 37

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3.5 Comparison of the interviews and theory .............................................................. 41

3.6 Comparison of the two interviews ......................................................................... 42

3.7 Comparing questionnaire to theory ........................................................................ 44

3.8 Limitations of this master’s thesis ......................................................................... 46

3.9 Future research ....................................................................................................... 47

CONCLUSION ............................................................................................................ 49

GLOSSARY ................................................................................................................ 51

REFERENCES ............................................................................................................ 53

APPENDIXES ............................................................................................................. 59

Appendix 1. Cover letter .............................................................................................. 60

Appendix 2. Multiple-choice questionnaire ................................................................. 61

Appendix 3. Multiple-choice questionnaire answers ................................................... 65

Appendix 4. Interviews of Chairman’s of boards ........................................................ 70

Appendix 5. Comparing interviews to theory .............................................................. 71

Appendix 6. Comparing questionnaire answers to theory ........................................... 73

SUMMARY (IN FINNISH) ........................................................................................ 75

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 LIST OF FIGURES

Figure 1. Principal-Agent model.................................................................................... 9

Figure 2. A Model of CEO duality. ............................................................................. 12

Figure 3. Issues in Agency theory................................................................................ 18

Figure 4. Research Onion of this master’s thesis. ........................................................ 21

Figure 5. Finnish Corporate Governance model .......................................................... 25

Figure 6. Key Features of Finnish Corporate Governance .......................................... 28

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 ABSTRACT

Kartaslammi, V. Contract and agent theories: Practical use in Helsinki greater economic
area. Master’s Thesis, Estonian Business School, Helsinki, 2018, 76 pages, 6 figures, 2
tables, 51 references, in English.

PRINCIPAL-AGENT, CONTRACT, OWNERSHIP STRATEGY, BOARD OF

DIRECTORS, OWNERS, CEO DUALITY, SHAREHOLDERS.

The purpose of this Master’s Thesis is to clarify companies’ recent situation of

Principal-Agent and Contract theory issues in Helsinki greater economic area. The main
focus in the review of literature is on the modern views of principal-agent and contract
theories, setting up this research in the larger context of modern views of these
traditional theories.

The research part consists of a quantitative survey and qualitative interviews and its
purpose is to clarify, what is the situation at this moment according to the corporations
and their boards of directors. Questionnaire was sent to Helsinki Chamber of Commerce
member companies’ top management and board members, and 100 questionnaires were
returned. Interviews were conducted with two experienced chairmen of Director’s
Institute of Finland.

In the third chapter, the purpose is to discuss the questionnaire results to the existing
theory, compare interviews to theory and make common suggestions to improve the
relationship of principals and agents. In addition, the interviews bring more detailed
information from top-chairmen to the reader on how today’s companies are managed.

In the conclusion, the author will evaluate the novelty value of the results of this thesis
and the way it will add value to the discussion on modern views of principal-agent and
contract theories.

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 INTRODUCTION

The idea and the subject matter of this thesis stemmed from a Helsinki Chamber of
commerce member corporation’s desire to get them recent information on principal-
agent issues. No earlier empirical research has been done concerning the Helsinki
Chamber of Commerce companies.

Famous economist and social scientist Adam Smith published a book called An Inquiry
Into the Nature and Causes of the Wealth of Nations (1776), in which he argues that
managers should not handle a company’s money as their own. This was the first time
in modern written history when principal-agent issues were discussed. In those days,
agents’ behaviour could be controlled better, if they got some incentives from the
company.

One of the most cited theories is developed by Jensen and Meckling (1976) and
explained in their article Theory of the firm: managerial behaviour, agency costs and
ownership structure. It connects elements of agency and contract theory, and links them
to principal-agent matters and describes the ownership relation in corporations. They
state that “[a]gency costs are as real as any other costs”. The level of agency costs
depends, among other things, on statutory and common law and human ingenuity in
devising contracts. Both the law and the sophistication of contracts relevant to the
modern corporation are the products of a historical process in which there were strong
incentives from individuals to minimize agency costs.

All the research questions below are related to the following research problem: no
earlier research has been done in Helsinki Chamber of Commerce companies, which
are located in Helsinki greater economic area, regarding the principal-agent and contract
theory issues. Due to this, the objective of this thesis is to clarify the recent situation in
Helsinki Chamber of Commerce companies. The research questions are the following:

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 RQ1. What are good incentive tools to remunerate agents?

RQ2. How remuneration issues support agents’ commitment to the company?

RQ3. What kind of methods today’s boards should use in the interaction between
principals and agents?

RQ4. Does the relationship between principals and agents have economic influence
on a company’s performance?

This master’s thesis uses the inductive research method, where the author tries to gather
all information based on the results and compare it to the literature. In the data collection
phase, both qualitative and quantitative methods will be used by using mixed methods.
The strategy to gather data is to use two expert interviews and a questionnaire survey
together to produce relevant information.

The thesis consists of four different chapters: Review of literature, Materials and
methods, Results, and Discussion. In addition, there is a glossary of the key terms used
in the thesis. In the Review of literature section, the principal-agent and contract ground
theories will be described with an added game theory aspect, and CEO duality issues
and other agent relationship matters are presented in the first section as well. In the
Materials and methods section, there is discussion on the process, why author chose the
methods and background information on the Finnish corporate governance systems is
provided. In the Results section, both interviews are summarized and the results of the
questionnaire are discussed and summarized. In the last section, the discussion
continues and the comparison of the interviews and the questionnaire results against the
theory is carried out.

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 1. REVIEW OF LITERATURE

1.1 Principal-agent theory

There are different definitions of the principal-agent theory from many decades. The
author himself defines the theory as follows: it is about resolving problems which could
exist in the agency relationship, if the strategy, goals or the vision are not clear to both
parties, and they have a different understanding of the existing risk level.

For example, Fama (1980) argues that usually the managing directors’ capability to lead
the company changes over the years. If changes take place in the human capital of the
CEO, the remuneration level could be calculated with help of a mathematical formula
from the past success and increase the level to correspond to the recent state of human
capital affairs. However, Fama states remuneration issues must be measured, and it is
always relative to the object what is a reasonable level of wages and other incentives.

Famous theorists such as Stephen Ross (1973) and Barry Mitnick (1974a) both claim
the original authorship of the theory. There is a connection between the concept of
agency costs and moral hazard phenomena in principal-agent issues. Based on
Mitnick’s (2007), there is evidence that they both independently and roughly
concurrently came up with two varieties of agency theory. Ross is responsible for the
economic agency theory and Mitnick is the author of the institutional agency theory. It
could be said that their theories are complementary. According to Mitnick’s (2007)
article, Ross described mostly the incentive problem in his articles and Mitnick focused
on the institutional structures of the theory.

In the 2010s, the perspectives in research on principal-agent theory have changed their
direction to observe more of the CEO’s return to shareholder issue. All benefits and
incentives in the future will, according to Fulmer & Nyberg (2010), be targeting the

10
outcome-oriented contract. In this study the researchers noticed that if incentives and
benefits are allowed to motivate the CEO to do the best choices on behalf of the
shareholders, those incentives must be structured, well-determined and monitored.

Figure 1. Principal-agent model. (Game Theory, Principal-Agent Problem &

Arthur Andersen. 2015).

According to Ojo (2013), the role of external auditor in companies is crucial to make it
possible to compare different corporations with each other. Comparing German, USA,
UK, India and Japan, corporate governance cultures and models are not simple. The
different rules, organisational cultures and differences in legislation must be taken into
consideration. However, the area of the European Union is generally the most
comparable area in the world. For investors and other stakeholder groups, it would be
beneficial if the corporations could be compared in a trustworthy manner when doing
business decisions related to a certain company in some way.

García, Rodriguez-Sánchez, and Fdez-Valdivia (2015) have turned the traditional set-
up upside-down. In their example, a principal was compared to a journal editor and the
agent to a reviewer. The idea is that the agent has usually more information and
knowledge than a principal in a particular field. How the agent should commit himself
or herself to the principal’s will? How the agency costs will be determined through
incentive program? Both parties must have similar knowledge of the subject being
published, and it should be communicated so that both parties are on the same level
concerning their actions. If it’s not, it may cause asymmetric information, which will
lead to a moral hazard. That is why incentives should be used in this branch to develop
mutual trust and the principal’s interests. The agent will successfully fulfil the

11
principal’s will, if there are enough data to manage the publishing process and estimate
its functionality with reasonable incentives given by the principal. These authors’
notions are essential to achieve a shared understanding about what should be done.

A very recent article by Kolbjørnsrud (2017) describes how collaborative communities

work differently compared to if a company would be alone. A community could be seen
as a third governance structure, which enlarges the concept of the original principal-
agent theory. Shared values, rules, incentives, property rights and the appropriate degree
of formalization discussed together form the basis of this multiple agency model that
works in collaborative communities. The nature of collaborative communities must be
merged with each other and network management must be linked to principal-agent
model in this wider agency context. The author of this master’s thesis, Kartaslammi,
has also studied this topic in summer course: Verkostot voimavarana (2011). The idea
is that one of the collaborative companies must be the “driver company”, which
organises operational issues and is responsible for governance. There is a close
connection between the author’s and Kolbjørnsrud’s (2017) views.

In the newest publication of Higgs (2018), the vision of governmental despondency

toward residents is illustrated by how such few people can represent hundreds of
thousands of people at the state level in the USA. He claims that when a genuine
representation of all people is impossible, then the iron law of oligarchy will come in
handy. Agents could not perfectly represent such a respondent amount in society.
Despite this, agents should try to represent the principals as well as they can, as citizens
in a society. Higgs’s (2018) research opens new perspectives for discussion about
modern views concerning the principal-agent theory, although Higgs’s view sounds like
too idealistic to be realized in the real world.

1.2 CEO’s duality

The CEO’s duality refers to a situation where the managing director of a company holds
the position of a chair of the board of directors at same time. Normally the chair of
board monitors the CEO’s actions and represents shareholders on behalf of them. The

12
board’s task is normally to make contracts and hire and monitor the managing director
for the company. This description is composed by the author.

It was only fifteen years ago, when the mobile phone company Nokia’s CEO Jorma
Ollila was at the same time the chairman of the board. As time went by, Mr. Ollila was
later the vice chair of the board as discussed by Yu (2013). It was the last significant
duality position in a stock listed company in Finland. Nowadays, the duality issue is
controversial, but it is legal and found in not-listed companies in Finland. (Finnish
Corporate Governance Code 2015, 22, 41).

However, Finkelstein and D´aveni (1994, 24-25) have written their concept, which is
based on contingency settlement of research and whose purpose was to find out whether
it is a good or a bad choice for a CEO to be also the chair in corporations. The CEOs,
who have high informal power, have significant influence on their company’s
performance. Boards with high vigilance have a positive connection with the CEO
duality matter. The researchers also noticed that agents do not always have different
goals than boards, who represent the principals.

Finkelstein and D´aveni (1994, 1-4, 17-19) suggest that agents’ performance can only
be evaluated in a subjective way. Incentives have to be separated as their own entity
when evaluating the performance of the managing director objectively. The conflict
level is always company-specific, but it varied depending on how well principals and
agents communicate. There will be a marginal cost for determining whose benefits are
primary, those of the principals as owners or those of the agent, who will manage the
company and make the best possible result for shareholders, and this task belongs to the
board of directors.

13
 Figure 2. A Model of CEO duality. (Finkelstein & D´avini, 1994, 7).

Figure 2. A Model of CEO duality. (Finkelstein & D´avini, 1994, 7).

When comparing western and eastern views of principal-agent theory, it can be seen
that the ideas about how good or bad the CEO duality phenomenon is varying. It is an
interesting question to ask whether the western understanding of the CEO duality is the
only right one? Are there cultural aspects behind the duality choice or something else?

There is an example from Bangladesh, where duality is used more often, and Afzalur
(2013) states that there are benefits at least in that kind of economies and cultures to use
the duality position as a CEO and chairman of the board of directors. The duality
concept in companies is best understood by referring to the Stewardship model, where
the same person is both in chair and CEO position to have a stronger influence on the
firm’s performance. Afzalur (2013) suggests that in listed companies globally the
duality question should be taken into consideration as it is in Anglo-American countries
at the moment.

One piece of enlightening research was conducted by Dennis, Ramsey and Turner
(2009, 1, 22-23). Their objective was to determine co-CEO’s management structures in
organisations. A presumption of their research was that the CEO in duality position
influences the stock price, but only slightly. Dennis et al. claim that the stock price is
dependent on co-CEO position, and it may have even weak positive influence and it has
effects on other companies in the same sector.

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Discussion about the co-CEOs continues by Ghosh, Karuna and Tian (2015, 21-22),
whose claims were that there is a basement for that concept. The authors admit that the
duality position is still controversial and there is no evidence that the CEO-Chair will
necessarily use his or her power against the shareholders. Their conclusion was that a
connection with managerial initiatives must be found for innovation to be greater, if
both roles are together.

1.3 Other agent relationships

Nowadays, when doing decisions in firms, taking only into account the shareholders’
needs is not enough. For example, the creditors, the stakeholder perspective, the
principal-principal-agent relationship, multiple agency and the minor-major
shareholder relationship should be taken into account. Modern literature has focused on
the idea of observing the agency relationship from different perspectives.

The minor-major shareholder relationship is one of the most important factors related
to the traditional principal-agent theory. Legislation determines the minimum
requirements for using voting right in a company and protecting minor owner’s benefits.
Loderer and Waelchli (2010) argue that in listed companies the minority shareholders
should be taken better care of than in not-listed companies. In listed companies’ boards,
there are more professionals and they have to take all shareholders into consideration
as equal owners of the company. In this Switzerland case, the corporate governance
discussion has focused on the equal treatment of all shareholders during the past 15
years. There has been empirical evidence that listed companies care more about
minority shareholders than not-listed companies by taking seriously the minority
shareholder position during a decision-making process.

A less familiar notion or concept of theory is the principal-principal-agent issue, which

has emerged in the discussion very strongly during this decade. Ward and Filatotchev
(2010) write about the relationship of two existing principals’, in which they compared
to ordinary agency relationship. The idea of using principal-principal concept is
alternative or complementary to the original principal-agent theory as a whole, and it is
vital for this assumption to make improvements between both principals’ and agents’

15
sides. It may be one of the future’s research targets to investigate more the principal-
principal-agency problem as a new phenomenon of the 2010s and it should be
generalized all over the industry.

Multiple agency theory is one of the most interesting ones in the field of agency theories.
There are different kinds of agency relationships in action all the time and influencing
each other. Arthurs, Hoskisson, Busenitz and Johnson (2008) have researched how the
time-horizon influences the CEO’s capability of taking risk, connecting it to the concept
of behavioral agency theory. If the CEO and owners both have similar motivations to
exit the firm within a very short time period, they may detriment the company itself and
act in the opposite way against the long-term benefits to owners. Long-term owners and
CEO have a better influence on the stock price during the initial public offering process
than short-term orientated venture capitalist owners.

Multi-stakeholder governance from the point of view of different transnational

organisations has become popular during the past decades to research it in terms of
principal-agent theory. It should be thought about how other agent relationships, like
multi-stakeholder governance, could be taken into consideration, when doing decisions
in multinational corporations and associations. From the perspective of the stakeholder
theory, it should be emphasized that there are also other major relationships, which the
board of directors and the CEO must consider, when they are making decisions.

According to Kooskora (2008), there are also other agency relationships than only the
traditional principal-agent relationship. For example; customers, banks, employees and
suppliers are groups, which should be taken into consideration, when doing business
decisions. It is not possible anymore to do business without caring about other
stakeholders than shareholders only. Kooskora (2008) argues that value should be
produced also outside the company. The society is an entity in which the company is
involved and doing its own part to fulfil its goals.

Co-regulation is today’s top research topic to investigate the global organisations’

legislation making and creating norms to mankind. Civil-society role has increased its
possibility to influence global initiatives of legislation during co-regulation time in
2000s. In her master’s thesis, Jalava has carefully studied the transnational
organisational perspectives to create guidelines for multinational enterprises in Finland.

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1.4 Applying game theory

The founder of Game theory John F. Nash Jr. (1950) Equilibrium Points in N-person
Games have been used today in applied version in board work. In the game theory, the
aim is to clarify how can the principals’ will be implemented by changing the rules of
the game, so that agents will do rational decisions motivated by self-interest, which
equal to the principals’ will. The game theory model attempts to explain how it will
influence the agent’s behaviour in a corporation to always do the principals’ best. The
basic problem is asymmetric information and the different needs of the parties.
Generally, the agent knows more about the company’s issues than the principals.

Helgesson (2015) has discussed in his doctoral dissertation how the game theory is
closely linked to principal-agent issues describing remuneration issues mathematically
and making some notices, for example that principal and agent issues should basically
be researched separately. He states that there should be a mathematically separated
model in agents and principals’ matters. Remuneration should be handled as its own
entity within the agency theory.

The Game theory is closely linked to risk management and evaluating the adequate level
of risk is one of boards’ main tasks claims Enicov (2016). When doing important
decisions, it should be noticed that there are enough relevant data available and it is
justified to use it in the process. Other analytical methods should be used within the
Game theory. Literally it means hard work of comparing different scenarios.

In the authors’ opinion, the game theory models and those applications are very
important in today’s business and especially in board work, where alternative scenarios
should be looked at, when deciding on the right option. The game theory might be a
useful tool for boards, and its use should be encouraged.

17
1.5 Contract theory

The idea that incentives must be aligned to exploit the gains from cooperation has a
long history within economics. In the 1700s, Adam Smith argued that sharecropping
contracts do not give tenants sufficient incentives to improve the land. In the 1930s,
Chester Barnard considered how employees could be incentivized to contribute effort
within large organizations. In 2016, the Nobel laureates Bengt Holmström and Oliver
Hart have approached these old ideas using theoretical models that have given us new
insights into the nature of ideal contracts. A perfect contract is rather problematic to
achieve. Moral hazard phenomena may appear, when rules and conditions are not clear
enough between principals and the agent.

Faynzilberg and Kumar (2000) state in their article that both the substantive and
technical side of principal-agent theory have to separate from each other in order to
generalize it. They have split principal and agency problems into two separate questions
and have studied both themes differently and independently. The purpose is to
investigate the root cause and the basic theory problem better, to optimize it and to
facilitate generalizability. It may be more meaningful to split the principal-agent theory
into two separate issues, when searching for contracts and trying to avoid moral hazard
phenomenon from occurring, if contracts are imperfect.

Nowadays, a famous principal-agent trend is the continuous-time Principal-Agent

model. Sannikov (2007) has focused on this model, which handles remuneration issues,
where the principal could not necessarily observe the agent’s actions all the time. This
model examines how short-term and long-term wages, effort and other incentives
influence making contracts. Finding the right cost level is essential, stated by Sannikov
(2007). There might be many factors that are dependent on the agents’ effort and
allocation of remuneration, for example, the agent’s outside options, replacing the cost
of agent and promotion possibilities, as he argues.

Because applying the traditional contract theory in making and monitoring complete
contracts is nearly impossible, there are other options to solve the governance issue.
There is an interesting view from Wahl (2015), who claims in his article that instead of
using the contract theory to define agents’ remuneration and other conditions,

18
ownership strategy could be used to replace original contract issues between principals
and agents. Ownership strategy is also bound to time-horizon and the will of owners as
the contract theory is. It determines that strategic audit is essential to decision-making
process and is by nature very systematically organized. However, the model is not yet
developed as far as the contract theory and it needs more research on theoretical
concepts.

According to the Nobel laureates Hart and Holmström (2016, 1), managing the moral
hazard phenomenon properly in the relationship between principals and agents is
difficult, because when ownership and control are separated shareholders might have
contrary interests, as Adam Smith (1776) has argued. Hart and Holmström argues that
“The contract theory does not assume that the agent is totally rational and selfish”.
Making a contract is also making sociological assumptions about how the agent would
behave and rule the company. The values and goals behind the remuneration should be
first discussed and then the remuneration tools must be decided upon based on how
effective the material and immaterial tools are and what is a good balance between them.

The contributions of Hart & Holmström Nobel price of Contract theory by Foss and
Klein (2016, 1-3, 6-12) presents criticism toward the modelling and the way Holmström
and Hart illustrate the contract and principal-agent matters. In their opinion, MIT’s style
to format theories is not applicable to the real-world situation and the Nobel winners
are lacking an entrepreneurial view of agency relationships. The number of variable
factors in the game-theoretical view must be taken into consideration when calculating
the costs of making a contract with an agent. There are too many variable factors, which
the Nobel winners have not considered, when making assumptions and calculations
concerning transaction costs. It is good that arguments can be presented even against
Nobel laureates’ article. In the author’s opinion, Foss and Klein’s view is closer to the
Economic school of Austria, and therefore their opposite views and criticism are in
place. They are logical in their criticism and raise the question about developing the
Hart and Holmström’s research topic further.

A classic example of a total Moral Hazard acting in a large corporation comes from the
USA: the Enron case at the beginning of the 2000s. Due to the massive Enron scandal,
the USA’s legislation was updated to correspond to today’s challenges and needs with
the Sarbanes-Oxley Act, which determined for the first time, on the level of a written

19
law, how good corporate governance and risk management should be organized and
managed. Other recent examples, such as Volkswagen’s emission scandal, has
weakened the belief in corporations’ top management and boards of directors and
questioned whether they have worked ethically and added value to shareholders’ equity.
When this matter was made public, the owners all over the world were furious because
the board and top management consciously kept it secret and let the situation happen.
This case suggests that making money as much as possible by using dishonest methods
is neither legal nor ethical nor the best solution for the owners.

Figure 3. Issues in the agency theory. (The Other Side of Town......., February 8, 2014.
On governing & moral hazard).

One of the most interesting issues of the contract theory is the CEO severance
agreement, when discussing remuneration and incentive matters between principals and
the agent. It determines how and what conditions both parties will accept when the
representatives of the body of owners, or the board of directors, are hiring a new CEO
for the agent position. Cowen, King and Marcel (2016, 1-8, 12-15) have researched the
interesting matter of agency cost, or severance agreement. The novelty value of their
research is considerably high, because there are only few studies in their field and they
are a kind of pioneers in this severance agreement matter. The essential aim of focusing
on the structural form of the severance agreement is to create a good atmosphere and
trust between both parties.

There would be a good opportunity to discuss influence of the severance agreements in

today’s companies as well as its possible influence on the performance level of the
company and agency costs. This could be one of the next decade’s trends in companies,
when knowledge of making severance agreements has spread enough. Today it is still

20
rare that severance contracts are determined accurately and its effect on how agency
costs is calculated in that case.

1.6 Summary

The works of these theorists have been discussed in this thesis because they represent
diversely different views and perspectives of principal-agent and contract theories. The
theorists’ views are reflected in the results obtained by the interviews and
questionnaires. It was essential from the point of view of this master’s thesis that they
date mainly from the 2010s. Traditional views and ground theories are also included in
the list of sources. Some articles were introduced in this thesis because of their novelty
value.

21
 2. MATERIALS AND METHODS

2.1 Research design

The author will make two expert interviews, with Mr. Eloranta (2017) and Mr. Aminoff
(2017) and deliver a quantitative survey to gather information for Helsinki economic
area in Finland to get an overview of the principal-agent issues. The interview questions
are attached to appendix 4 and the answers are found in chapters 3.2 and 3.3. The
research design is generally narrative by its method to observe phenomena of the
principal-agent theory compared to the contract theory and how those issues are solved
in Helsinki greater economic area and in the opinion of Finnish board association
professionals.

The validity of this empirical research comes from using both qualitative and
quantitative methods that support each other. The validity of the results of interviews
and survey questions have a primary importance in this research. The research as whole
should be present in general context and give theoretical legitimacy for the
questionnaire and interviews to give a realistic picture of principal-agent issues (Robson
2002). It is also ethically produced and it contains the correct information to be reliable
research, which could be repeated by doing a similar study again in Helsinki greater
economic area and of course elsewhere in Finland.

The author illustrates the research design by using the Research Onion Model developed
by Saunders et.al. (2007). They describe methods, approaches, philosophies and
strategies that are also used in this master’s thesis research. Techniques and procedures
to collect data are both quantitative and qualitative. The time horizon is cross-sectional
and the way to gather data is using mixed methods. The strategy involves using the
expert interview as a method and a survey together to produce relevant information.

22
The approach of this research is inductive, meaning that the author attempts to
generalize all information based on the results and compare it to the literature. The
philosophy behind this research is realism, which refers to the need to justify
phenomena in practical life, tying them to the theoretical context as well.

Figure 4. Research Onion. Composed by the author. (Original adaptation of Saunders

et.al. 2007).

2.2 Data collection and analysis

Data collection questions are related to principal-agent issues and their practical and
deep understanding in real life. In this thesis, the author uses primary data from the
questionnaire answers in the quantitative section. In addition, primary data was also
gathered by interviewing two chairmen of board who are members of the Directors’
Institute Finland. To make it easier to compare all the answers, all the questions are
more or less in the same form in both the qualitative and the quantitative section. The
approach chosen for this thesis is a mixed method where the quantitative primary data

23
is acquired from the questionnaire results and qualitative interviews by using an in-
depth interview method.

2.2.1 Qualitative interview

The qualitative data is based on two expert interviews, or non-standardized in-depth

interviews (Healey 1991, King 2004) with two members of Directors’ Institute Finland.
In the Results and Discussion sections of this thesis, the author will examine the
relationships, differences and trends based on the empirical results and theory
(Silverman 2007).

The purpose of the questions is to determine principal-agent and contract theory

principles that exist in the theorists’ views and also in real-life. Questions are made to
illustrate the most important aspects of principal-agent and contract theory issues. The
questionnaire is composed by the author and it is found in appendix 4.

In the qualitative section, there are interviewer-administered questions and a more

detailed structured interview with some open questions in addition to a few closed and
specific questions (Easterby-Smith et.al. 2008). The primary collected data will the
basis of the analysis, and while it clearly offers value to this thesis, the secondary data
will come from the theoretical background to clarify the results regarding the topic of
this thesis. The cover letter is attached in appendices and its purpose is to clarify the
aim of this thesis and tell the respondents all the necessary information. There is a
promise of anonymity, and the number of days to answer and for what purpose the
responses are analysed are mentioned.

2.2.2 Quantitative questionnaire

Quantitative data will be the main data form in this thesis and it will be analysed.
Questionnaire is self-administered as its form and its nature is delivery and collection

24
questionnaire (Oppenheim 2000). Questions were formed so that the respondents could
tell their own opinion, not only what their companies back in the past have done
(Dillmann 2007). The results of the questionnaire are basically repeatable, and the study
could be reproduced to any other Finnish Chamber of Commerce (Robson 2002).
Therefore, the questions are forced-choice questions, because they have to be
comparable with the interviews and also with the theoretical background (deVaus
2002). To measure differences and importance of some questions, the author will use
Likert-style rating: a 5-stage version with the added option “I cannot say” below each
question (Corbetta 2003). In addition, every question has an open comment field
(Dillmann 2007). The questionnaire is in Finnish to make sure that the questions are
understood by all potential respondents. After the analysis of the answers, the results
will be interpreted with the help of tables.

The purpose of the questionnaire is to determine principal-agent and contract theory

principles that exist in the theorists’ views and also in real-life. Questionnaire are made
to illustrate the most important aspects of principal-agent and contract theory issues.
Questions are composed by author and those could see in appendix section. In Appendix
The questionnaire is composed by the author and it is found in appendix 1. there are
cover letter, in appendix 2. there are questions and in appendix 3. are answers of
questionnaire

The survey was published on Helsinki Chamber of Commerce Twitter page on

20.4.2017 and on their Facebook page on 20.4.2017. The results were collected with
the help of SurveyMonkey platform. The questionnaire was published in
SurveyMonkey -platform and the link to questionnaire was send with regular e-letter of
Helsinki Chamber of Commerce: https://fi.surveymonkey.com/r/KGCPQKG.

2.3 Ethics of research

In this thesis, the ethical aspects are taken into account in several ways: 1) The author
does not have any relationship to Helsinki region Chamber of Commerce and its
member companies, 2) the author has no stock ownership, previous employment or

25
other notifiable connections to the Helsinki Chamber of Commerce, 3) the author did
not have any kind of previous knowledge or experience of Directors’ Institute of
Finland.

Research was not supported by any external organisation, there is no commercial

motivation to do it and it is only based on the author’s own desire to serve the larger
community. All multiple-choice questions are anonymous and the respondents could
not be identified. The research methods are documented in the previous chapter. In the
quantitative survey, confidentiality is the absolute prerequisite, so that respondents
cannot be identified, the results will show the recent situation and serve therefore the
wider audience. With the help of the SurveyMonkey tool, the questionnaire responses
could not be identified by any means. All interviewees have participated in the
interviews voluntarily. All respondents in the survey have also voluntarily answered to
the questions and they had the right to not answer all questions by choosing the option
“I cannot say”, if they decided so (Cooper and Schindler 2008). According to Zikmund
(2000), this kind of research design is both methodologically and morally defensible
and fulfills the requirements of surrounding environment. No preliminary data or
assumptions were told in the cover letter and the concept was the same when
interviewing, so the interviewees were free to answer what they wanted.

There is no possibility for abuse of data by other persons, because all material is
collected by the author and the responses represent the primary data, which will be
processed by the author only. Regarding the legislation of EU directive 95/46/EC, all
data have been handled with great care and trust. Data have been stored on the
SurveyMonkey platform behind a password, which only the author knows (Marshall
and Rossman 2006). Results and suggestions of improvements will be published later,
so that only after this master’s thesis has been publicly accepted, the results will be
shared with the stakeholder groups.

26
2.4 Finnish model of corporate governance

To make sure that the reader can understand how the Finnish corporate governance
works, the author will clarify some specific issues: What kind of a corporate
governance structure is generally used in Finland? How is the top board management
organized in corporations in Finland? The most common factors that illustrate the
Finnish corporate governance model (2015) are listed below.

1. One-tier model
2. Management Board
3. External Board
4. Finnish shareholder agreement
5. Code of conducts
6. Committees

Figure 5. Finnish corporate governance model. (Original adaptation of Finnish

Corporate Governance model 2015, 12).

Finnish Corporate Governance Code (2015) is the newest publication of corporate

governance codes by Securities Market Association, which was founded in 2006 and it
is established by Nasdaq OMX Helsinki, the Confederation of Finnish Industries and
the Central Chamber of Commerce of Finland. Central Chamber of Commerce of
Finland purpose is to support and promote good corporate governance habits in Finland.
It is intended to listed companies and is based on the Finnish legislation by
supplementing it. Central Chamber of Commerce of Finland works together with the
Central Chamber of Commerce of Finland, which is part of a global network of

27
chambers of commerce. A chamber of commerce’s ultimate purpose is to remove
barriers for trade and give tools for good corporate governance.

According to Finnish Corporate Governance Code (2015) Finland has a one-tier

system, which is characterized by a straight line from owners to the management level.
Everything begins with the shareholders and an annual meeting. In the annual meeting,
the strategic board of a company, which represents the shareholders’ equity and
composition as well as possible, is chosen. The board controls the strategic decisions
and gives orders to the CEO and other top management. The CEO is like a steward for
the board, who executes the decisions in practise. The CEO controls another top-
management team and the chain continues from top to bottom. The one-tier model also
means that there are no second boards or any other structure between owners and
managers.

Boards are mostly management boards in Finland according to Finnish Corporate

Governance Code (2015). The management board is a simple solution for its structure
and it represents the will and the ownership of the shareholders. The board always has
to take into account what is best for the company and all of its owners, with equal
treatment of all shareholders. There are also other models such as supervisory boards,
which are mainly used in companies which are characterized by government ownership.
This model is generally used in Central European countries, because of a different kind
of history of working environment and legislation. The supervisory board gives advice
and monitors the management board. In Germany, for example, this model is widely
used. and there is a guaranteed position to employee representation.

By the regulation of Finnish Corporate Governance Code (2015), boards are also
external in their nature. Internal boards are not used, except in small start-ups, which
may also have operational boards. Strategic and operational power is normally
separated in Finnish companies. The board makes strategic decisions and hires the best
people in the company. In the Finnish context, external boards derive from the law and
the tradition of the principles of corporate governance. It is widely accepted to manage
Finnish corporations in this way.

A central part of corporate governance is the shareholder agreement. It will define

responsibilities and rights of shareholders as well as their limits on using decision
making power in a company. In Finland the Finnish Corporate Governance Code 2015

28
regulations are used at the moment, and they are defined by Securities Market
association, which operates in the Finnish Chamber of Commerce office in Helsinki. Its
purpose is to supplement regulations, which are issued by law, and interpret the law in
a more detailed style.

A law attorney Hammarström Puhakka Partners (2016) writes that the shareholder
agreement is based on Finland’s own legislation and tradition to govern boards. It
includes three parts: the law sections, which are usually limited by the liability act, the
employee act and the competition act. The soft law is written by the company itself, and
the company also comprises articles. It should be noticed that a company’s internal
articles and the soft law are not valid unless all shareholders sign up the shareholder
agreement, but the requirements of the law are always valid. The shareholder agreement
describes how the company is managed, financed and what kind of an ownership
structure it has.

There is a mutual concept of the soft law term at the European Union level, which is
determined by the European Observatory of Working life (2011). The definition of the
soft law is basically the corporate governance practices which are implemented in the
company. It also includes principles of the OECD transformed into the Finnish context.
Its purpose is to define the rights of shareholders, guarantee an equal treatment of the
shareholders, clarify the role of stakeholders, make clear disclosure and transparency
rules and highlight the responsibility of the board. Articles include contracts and priority
issues.

Codes of conduct are common in stock listed companies today. According to

Investopedia (2018) web-page, nearly every company has produced its own code of
conduct. According to this source it is about how matters, culture, processes, values etc.
are handled in the company. It represents the spirit of a company and tells us about the
company’s expectations and promises for environment and stakeholders. The code of
conduct is determined by each company itself and it is the basis of all their actions. The
codes of conduct can be divided, for example, to compliance and value-based codes of
conduct. The concept code of conduct is nearly equal with the term code of ethics,
because it generally describes the same elements.

According to Finnish Corporate Governance Code (2015), committees in Finland are

usually audit or nomination and remuneration committees. Only the audit committee is

29
based on the law, but nomination and remuneration committees are based on the
regulations of Finnish corporate governance and are recommended. The importance of
remuneration committees has risen, and its task is to figure out the balance between a
moderate remuneration level and a reasonable incentive program to create a
commitment to managers. The nomination committee’s task is to find the best possible
candidates for the company and they normally do this by using a sourcing method.

Figure 6. Key features of Finnish corporate governance. (Original adaptation of

Finnish Corporate Governance Code 2015, 15).

2.5 Research Bias

The author of this thesis has recognized the possibility of both researcher and
respondent bias, which may exist in the thesis by using information from Quirk’s media
(2015). However, bias has been attempted to be consciously avoided. The researcher
bias is mainly an issue in the qualitative section, where author has more influence during
the interview process. The respondent bias is mainly an issue to be considered in the
quantitative survey. Both types of bias are going to be examined carefully.

According to Explorable (2018) web-page information, researcher bias means that a

researcher could be misled. If it is done intentionally, it is serious lack of academic
excellence. The research design, and all methods as well as collection techniques etc.
have been told openly in the chapters above. There was free opinion discussion
concerning the principal-agent field by Mr. Aminoff and Mr. Eloranta, and they

30
willingly shared their views. Responses are analysed and quoted in all essential matters
they have told to the author.

Referring to the FluidSurveysUniversity (2013), respondent bias means in this context

the respondent’s ability to answer honestly and give accurate information of asked
questions. 100 answers were collected through Survey Monkey -page. The
questionnaire was sent to Helsinki chamber of commerce Facebook and Twitter pages,
which are not very closed systems, and as internal e-post for member company
representatives.

Because it was an anonymous internet survey, and it was shared on Facebook and
Twitter to achieve a greater number of results, the author cannot be sure whether all the
respondents really are representatives of Helsinki Chamber of Commerce member
companies. Other possible bias, that could be inherent to the survey process, could be
that there were no demographic questions in the questionnaire nor in the interviews.
However, it is unlikely that they would have influenced the validity and generalizability
of this study in these circumstances.

31
 3. RESULTS AND DISCUSSION

This chapter provides an overview of the questionnaire and interviews results. The
interview process and the questionnaire are explained in the following chapters. All the
quantitative and qualitative data and the question sheets are attached in appendices at
the end of this thesis. The answers to the interview questions and the data collected
through the questionnaire will be analysed. The purpose is to compare and contrast the
interview and questionnaire responses with the researcher’s views of those.

3.1 Introduction to the interviews

The purpose of the expert interviews was to study the interviewees’ most important
ideas about the phenomena and issues concerning the principal-agent and contract
theories. There are two interviews, which were done with major board professionals in
Finland. Mr. Aminoff’s interview was held on 6 March 2017 in Veho’s headquarters in
Vantaa and Mr. Eloranta’s interview was held on 14 March 2017 in the stock-house in
Helsinki, Finland, and both meetings between the author and the interviewees were
organized by the secretary of the Directors Institute of Finland. Both Mr. Philipp
Aminoff and Mr. Jorma Eloranta have an extensive knowledge about long-term
management, and a chairman of board experience. They both have had a central part to
play in their companies, especially being chairmen of the boards for many decades.

Mr. Aminoff’s experience in board work was obtained in HelvarMelca, Veho and many
other companies where he has acted as the chairman of board. He has over two decades’
experience, but only in non-listed companies. He is in his mid-fifties. Interview
questions is found in appendices at end of this research paper.

32
The other person interviewed was the chairman of board in Neste and Stora Enso, Jorma
Eloranta, who is also one of the members of the Directors’ Institute of Finland. He is
the chair of Neste, Uponor, Stora Enso and a member of board in Cargotec. His
background includes being in the CEO position in many companies, of which the most
well-known is probably Metso corporation, which operated in mining, paper machines,
and metal industry businesses. He has an MSc degree in Industrial Engineering and he
has also been given the Finnish honorary title of ‘vuorineuvos’. He is now in his mid-
sixties. Interview questions are found in appendices at end of this research paper.

The interviewees’ wide knowledge and experience all around Finnish industry were of
great added value for this thesis. This is why the author thinks that their opinions should
be taken into account, when searching for answers to what kind of economic influence
the CEO’s and owners’ relationships have, and how remuneration issues are handled in
modern organizations. They also have a strong vision about how to develop corporate
governance practices and how the board work could be as efficient as possible in today’s
companies.

3.2 Interview with Philip Aminoff

Before the questions, Mr. Aminoff wanted to underline the significance of

communication and developing mutual understanding between the owners, the board
and the management. According to him, councils of owners should be found in a larger
scale in listed companies. “It should be remembered that the major shareholder view or
opinion is not necessarily the best option for the corporation”.

State-ownership companies are another issue. Even if the government owns a stock
majority, they are equal with the other shareholders. In most cases the minister of state
ownership did not understand the fact that the government’s best is not necessarily the
best of the company. Mr. Aminoff drew attention to his statement that “this is a tricky
question where more discussion and public opinions are needed to re-create mutual
desire to control state-ownership companies.” Companies should be able to act within
a free market system and be competitive and fair towards competitors.

33
Firstly, Mr. Aminoff underlined that different concepts of time horizons cause major
conflicts in board work. For example, he clarified that an anchor-owner may have very
long-term goals whereas the CEO may have only a short-term interest to develop their
own career. This may cause conflicts of interest between owners and CEOs.

Secondly, Mr. Aminoff emphasized the importance of who the principal actually is.
How can the board know, what the principal really wants? These questions Mr. Aminoff
answered by raising new questions.

Mr Aminoff said that the interest of the owners must always be the primary mission of
board members. He continued in the next question that there should be more discussion
between owners and board members. In his opinion, the board autonomy is too high in
Finland.

General knowledge of principal-agent issues is rather good today. However, the

legislation is old-fashioned and should be updated soon. Sometimes the owners do not
need so much profit as the company could make. “Understanding the basic elements
behind business is wisdom”, Mr. Aminoff ended his statement.

Mr. Aminoff claimed that contract theory issues are generally well understood in
companies. He represents the view that contract theory issues are mainly measurable by
remuneration policies and doing business in a sustainable way. Mr. Aminoff pointed
out some examples, such as the Volkswagen and Enron cases. On the theoretical side,
Mr. Aminoff claims that the contract theory is best applied to practice in matrix-
organizations. In America, they use GAPP documents while in Europe the focus is more
on the financial balance sheet correctness, which is seen as giving all the necessary
information about the company’s situation. Mr. Aminoff stated that “nowadays there is
a cultural collision between these two different schools of compliance”.

The CEO’s duality position is not possible in Finland anymore, Mr. Aminoff said
sharply. In non-listed small and medium size companies it still happens today. The audit
committee should control issues like this today. The chairman’s position is more
important today as during the past two decades. “In short, the chairman is the voice of
strategy and owners will”, Mr. Aminoff declared.

“What needs to be developed is the value creation to shareholders”. Money is not the
only important element to owners today. There are ethical aspects as well as

34
environmental and sustainability issues that are stressed more nowadays. The board
should really care about and try to figure out what the owners want”, declared Mr.
Aminoff.

Holistic thinking is more important today than before. In addition, the ethical aspect is
being better taken into consideration, stated Mr. Aminoff. The negative side is that
stakeholders may have various interests within a company, and it causes more problems
than before. According to Mr. Aminoff, sharing information is still not as effective as
could be expected. Confidential information is shared too easily and this problem is not
taken as seriously as it should be to solve it. He continued that “wiping off invisible
corruption must be the next step in corporate governance practices”.

3.3 Interview with Jorma Eloranta

Before we moved on to the questions, Mr. Eloranta presented his principles and
experiences in a very philosophical manner. He said that “If we are talking about
principals, we must, in the Finnish context, separate owners from investors. In Finnish
companies, there are mostly visible and recognizable owners, whereas investors do not
have such a big role in the ownership structure”. He argues that if only the investors
own the company, then the principal-agency theory is very valid, but if there are visible
owners, then the need of this theory is not that justified. He compared Finland to the
USA where owners are limited mainly to investors whereas in Finland and Sweden the
owners have faces and are visible in decision making processes.

Mr. Eloranta does not see any existing major conflicts. He continued that: “the
remuneration theme is boring” and ended the discussion. The role of the chairman has
radically changed during the past years. Today it is more focused on hiring best
candidates and controlling remuneration policies. The position of the chairman is more
professional than before. The increased amount of legislation and restrictions are
already a risk to companies’ businesses. The board of directors cannot decide their own
remuneration anymore. The board of directors are very independent today and are not

35
dependent on the company itself. According to Mr. Eloranta, this change has been good
for the overall branch development.

The insider transactions have changed much when compared to 1980s. At that time, it
was a matter of pride and honour to increase one’s personal wealth. Nowadays, the
CEOs do not make decisions which influence their inner-circle people.

The most important issues that should be understood about the principal-agent
relationship in his opinion are found in the following statement: “The goals are to profit
the shareholders, to treat everyone equally, and to increase the responsibility of the
management”. All those aspects come directly from the law and are the basis of a good
business, declared Mr. Eloranta.

Communication and creating trust will have a more important role in the future. A non-
executive forum may be a good solution for this matter. Mr. Eloranta told me that Neste
has done it during the last years. Mr. Eloranta stated that the code of conduct from 2015
determines all practices in the field in a thorough manner. The law is clear and the game
is fair to everyone. The knowledge of rules and conditions has increased during the
recent years.

Mr. Eloranta stated that the remuneration of executive management contains good
incentive tools and reasonable balance between payment level, which should be related
to daily discussion about the remuneration level, habits and ethics. When earlier
requirements are fulfilled then there is the contrast to theory matters. Mostly
remuneration means financial benefits, based on the annual salary, bonuses, and short
and long-term incentives. It is important that the board sets the right indicators, which
describe the strategy of the board. Some titles, showing honour, and other non-material
ways of rewarding are today even more important than just financial rewards. The
feeling of success and a good atmosphere inside the company may be primary aspects
to take into consideration for modern executive managers.

How to remunerate agents, or CEOs, is clear in the opinion of Mr. Eloranta: “It should
represent the company’s strategic decisions and balance between moderate reward
amount or not”.

“Does the will of owners or investors exist?” Mr. Eloranta asked. He claimed that
owners should monitor the board of directors’ risk level balance and acceptance of a

36
right level. Mr. Eloranta continued that: “The government may have different views
than the other shareholders, as it commonly is in the partly state-owned companies. It
causes problems because boards cannot favour some shareholders, whether it is the state
or not. That is tough to understand for politicians in most cases, at least when talking
about recent years’ experiences” claimed Mr. Eloranta.

According to Mr. Eloranta, the Game theory models have been used in board
management tools, which have been introduced to boards by consultants. He added that
in all cases the best possible option and the worst-case scenario must be on the table
when something is being decided. Controlled and manageable risk taking is good for
the growth and development of a company. From his own experience, he said that
different scenario simulations are made more often today than before.

Mr. Eloranta argued that the Finnish corporate governance model may be the best in the
world and added that “we should not bring here more American style of governance”.
There is enough diversity in boards today and governance models must always relate to
the cultural context. In that case, the Finnish model fits best here, he concluded.

Mr. Eloranta points out that there are critics who doubt whether theoretical models
actually work in real life and question the way to motivate people. If traditional
Maslow’s hierarchical needs are fulfilled, money is not the priority for everyone. There
is also criticism toward the question about a moderate amount of remuneration for the
management and board, but Mr. Eloranta thinks it is an eternity question.

“Did we create value of this meeting?” is a direct citation of Mr. Eloranta that he used
while working for Neste. The board’s most important decision is to choose where in
business they are and are not. “Committed people are double or triple time better co-
workers than an ordinary employee”.

3.4 Multiple-choice questionnaire answers

A questionnaire was sent to all Helsinki Chamber of Commerce member companies via
e-mail. A cover letter and a link to the questionnaire were attached to the e-mail. The
questionnaire was open between 10 April and 21 April 2017. The total number of

37
member companies in Helsinki Chamber is approximately 7000. It was send with the
help of Helsinki Chamber Linked In page, Twitter page and regular e-mail by the
secretary of Helsinki Chamber of Commerce. There were no other possible channels
that could have been used in the timeframe of this research. With the help of all these
channels, 100 answer sheets were collected. The questionnaire was conducted with the
help of SurveyMonkey online survey tool. The response rate is reasonable and the
sample size is large enough to enable making generalisations about present knowledge
of principal-agent and contract theory issues.

In question one, the result of answers is very clear: 55 % of the respondents evaluate
managing directors’ knowledge to level “somewhat good”. The option “very good” was
chosen by 15 % of the respondents. The majority of the respondents, 70 %, say their
managing director has “very good” or “somewhat good” knowledge about principal-
agent issues. However, 21 % of the respondents have chosen the “not particularly good,
but not bad” option. This might suggest that maybe information about principal-agent
issues should be spread more widely. 20 % of respondents were neutral in their opinion
about their director’s knowledge of this matter.

Within question two, there is more dispersion than within question one. A slight
majority of the respondents said the knowledge is “somewhat spread”, but nevertheless,
a significant number of the respondents, 32 %, evaluates that their general knowledge
about the principal-agent theory is “fairly widespread”. Together these two options give
a general picture of the present situation according to the respondents. One of tenth of
the respondents, however, said that knowledge is “not very widespread”.

Question three sought an answer for how well the owners’ will was implemented in
practice by the board. The majority of the respondents, 81 %, answered that it is handled
“very well” or “somewhat well” in their opinion. However, more than one of ten
respondents chose the option “not particularly well, but not badly”, which represents
neutral opinion and it could be interpreted that these issues are quite properly handled.

In question four, the questionnaire goes further in the topic and tries to search an answer
for the question how well the managing directors cling to the owners’ will. The majority
of the respondents, 76 %, says that managing directors cling to the owners’ will either
“very well” or “somewhat well”. Neutral opinion, “not particularly well, but not badly”

38
was put forward by 13 % of the respondents, which could be seen as a deviation from
the general view of the respondents.

Question five was about conflicts between owners and managing directors referring to
principal-agent issues. The majority of the answers are on the negative side in Likert-
scale. However, in this question, the negative side of the question options actually
represent a good situation in firms, meaning that there is no conflict within principal-
agent issues. The option “rarely” was selected by 35 % of the respondents and the “not
at all” alternative got 20 % of total answers. The majority of respondents, 55 %, says
that there are rarely or not at all conflicts between owners and managing directors
referring to principal-agent issues. There is a significant number of “I cannot say”
option because 13 % of the respondents did not recognize the problem at all or cannot
determine or did not understand it. In addition, a significant number of respondents, 15
%, says that there are “not particularly much, but not the least” conflicts between owners
and managing directors. In total, 17 % of the respondents are, however, of the opposite
opinion than the majority. They see “very often” or “somewhat often” conflicts between
owners and managing directors.

In the sixth question, the majority of the respondents say that there is “rarely” any
collision and misunderstandings related to changing good corporate governance habits.
43 % of the total amount of respondents answered this way. The alternative “not at all”
got 20 % of total answers, which can be seen as a significant amount, confirming the
general view of the respondents. Most of the answers, 63 %, are strongly of the opinion
that there is no clear collision or misunderstandings in companies in general. The “not
particularly much, but not the least” option was, however, selected by 14 % of the
respondents, which may represent uncertainty about what is collision and
misunderstanding in a company. Totally, there were also 15 % of the respondents, who
think that there is either “very much” or “somewhat much” collision and
misunderstanding.

The purpose of question number seven was to find out whether the relationships
between managing directors and owners have some economic influence. Most
respondents, 74 %, clearly think that does have this sort of influence. 20 % of the
respondents say that there are “very large-scale effects” and 54 % say that the owners
and managing directors’ relationships have “some effects”. It is nearly three of four,

39
who see a connection between the economic influence and the relationships, if the
relationship is properly taken care of. On the opposite side, there were also 15 % of the
respondents, who say that there the relationship has no impact with the alternatives “not
much impact” and “not at all”.

Question eight aimed at clarifying how well the company’s board of directors has
succeeded to make the managing director commit to the will of the owners. The
majority, or two thirds, 66 % of the respondents, thinks that the board of directors has
succeeded to make the managing director cling to the will of owners. The “very well
committed” alternative was selected by 22 % of the respondents and “somewhat
committed” by 44 % of the respondents. Nevertheless, one third of the respondents are
of the opposite opinion, but only one of those is the “I cannot say” alternative, which is
not bad at all. However, 15 % are not so certain that the board of directors has succeeded
to make the managing director cling to the owners will. The uncertain or neutral answer
alternative was chosen by 18 % of the respondents, which is particularly high in this
question.

The ninth question deals with how diversely the board of directors has used different
reward methods to enhance the managing director’s commitment to their company.
Most of the respondents, 64 %, think that companies have used a variety of methods to
reward their managing director to improve commitment. 23 % of the respondents say
that different ways of rewarding have been “extremely diversely used” and 41 % say
that it they have been “somewhat used”. Despite these good results, more than one third
of the respondents see the situation differently. 20 % of the respondents think that the
situation is opposite to what the majority thinks. They say that different rewarding
methods to enhance the managing director’s commitment to their company are “not
much used” or “not at all used”. Only two of the respondents selected the “I cannot say”
alternative, which shows that there is not much uncertainty in understanding this
question. The alternative “it is not used in either way” got 14 % of the respondents.

In question ten, there was more dispersion than in any of the other questions. The
uncertainty around this question is very significant. The majority, or 48 % of the
respondents, answered that they have no conception of this matter – picking either the
“somewhat badly” or the “very badly” or the “I cannot say” alternative. The uncertainty
can be seen clearly in the illustration of the answers because only 23 % of the answers

40
are on the positive side regarding the knowledge of the contract theory. The neutral or
“not particularly well, but not badly” alternative has the highest column in the figure.

3.5 Comparison of the interviews and theory

In this section, the review of literature is being compared to the interview results. On
one hand, the answers to the interview questions depict more or less the same ideas
presented in the review of literature, which the reader can see in Table 1 below. On the
other hand, some of the answers are more difficult to compare directly to theory sources.
Both interviews are supported by the theoretical background in a similar manner.

The review of literature introduces modern views concerning the principal-agent theory
such as those by Arthurs et.al (2008), Kooskora (2008), Dennis et.al (2009), Ward &
Filatotchev (2010), Fulmer & Nyberg (2010), Loderer and Waelchli (2010), Foss and
Klein (2016), Jalava (2017), Kolbjørnsrud (2017) and Higgs (2018) as well as the views
of contract theorists such as Faynzilberg and Kumar (2000), Sannikov (2007), and
Cowen et.al (2016), which equal more or less the answers of the interviews. Due to the
common understanding of theory reflected in the interview results, the biggest issue
seems to be the implementation of modern views in practice, as Mr. Aminoff and Mr.
Eloranta both argued.

When analysing the table 1, appendixes 5, should be noticed how it is related to the
research questions. All theorists mentioned in the table have introduced views and
perspectives (Review of literature) which equal more or less to the interview answers.
Most of the theorists’ views are rather modern, in 2010s, but there are still traditional
theorists such as Jensen & Meckling (1976), Ross (1973), Mitnick (1974a) and Fama
(1980). In the recent years researchers such as Sannikov (2007), Dennis et.al. (2009),
Ward and Filatotchev (2010), Fulmer & Nyberg (2010), Ojo’s (2013), Afzalur (2013),
Sebald and Walzl (2014), Helgesson (2015), Hart and Holmström (2016), Kolbjørnsrud
(2017) have had interesting views and modern perspectives related to the theories
discussed in this thesis in the author’s opinion.

41
Beginning with Research question 1, which asks what good incentive tools there are to
remunerate agents, the answers show that the interview question 7 equals to that. The
interviewed chairmen see that good incentive tools are mostly financial, but more and
more often also ethical and environmental issues have a role to play. The theorists
whose views are in line with these answers can be found in Appendix 5

Continuing with RQ2, which focuses on how remuneration policies support agents’
commitment to the company, the interviews results indicate that making the agent
committed to owners’ will requires a remuneration policy which is based on the
company’s strategy results. Both interviews support in questions 6 and 7 the idea
proposed by the authors mentioned in Appendix 5. could be find the theorists, who’s
views equal to answers and noticed that they are in line with the views of Mr. Eloranta
and Mr. Aminoff.

The goal of RQ3 was to examine, what kind of methods today’s boards should use in
the interaction between principals and agents. The interview question 9 answers this
research question well. The interviewed chairmen said that a holistic thinking in all
matters as well as ethical issues are today’s tools in these discussions. To connect the
element of success to the discussion of agent remuneration is essential in their opinion.
The theorists whose views are in line with these answers can be found in Appendix 5.

The last research question, RQ4, aimed at finding out whether the relationship between
principals and agents has economic influence on the company’s performance. Both
interviews support this idea (questions 11 and 13) very clearly. Mr. Aminoff and Mr.
Eloranta both stated that the relationship between principals and agents has a significant
influence. They continued that economic success is linked to the agents’ remunerations
as well. The theorists whose views are in line with these answers can be found in
Appendix 5.

3.6 Comparison of the two interviews

The thoughts of the interviewees are somewhat similar, but there are also differences.
Generally, Mr. Aminoff’s ideas represent a more modern view of corporate governance

42
issues than those of Mr. Eloranta, who is more traditional in his views. Mr. Aminoff has
sat on not-listed companies’ boards whereas Mr. Eloranta has sat mostly on listed
companies’ boards. There were differences concerning some questions, but in the
author’s opinion it is more valuable to look at similarities than differences and so make
fruitful assumptions and conclusions. Hence, the author will highlight the
commonalities of views regarding both interviews.

In questions six, seven and eight they both have similar views about remuneration, its
tools and how the contract theory will be implemented in practice. Remuneration issues
should be seen, because of these similar answers, as one of the key elements of
Corporate Governance and today’s management issues and habits. Questions 11, 12 and
13 reveal a similar attitude toward the CEO’s duality position and how the code of
conducts, laws and economic success defined what kind of methods should use to
manage the company. They both agree that performance is dependent on relationships
between principals and agents unquestionably. The answers to question 15 suggest that
they see the contemporary top trends very similarly. Both agree on the fact that
stakeholder theory and its implementation will have a more significant role in decision
making in the future. How board should create value to owners, and how to measure it,
was in their opinion an important matter. They both said clearly that value creation will
be one of the top trends in the future.

Other matters that arose during both interviews was the role of the state of Finland and
its ownership policy. Both agree that government does not always understand its role in
companies, even the company is partly state ownership for its structure. The board
should treat all the shareholders equally, even if the state has the majority of shares. The
board should always try to figure out the best for the whole company and all
shareholders, not only for major shareholders. This was an interesting view that
underlined the boards’ purpose and their tasks in today’s world. The author brought up
this view und underlined its importance, because both interviewed members of
Directors Institute of Finland themselves spoke about it.

43
3.7 Comparing questionnaire to theory

In this chapter, the views of researchers found in the review of literature are being
compared to the questionnaire results. On one hand, the questionnaire answers are more
or less in line with the thoughts of the researchers. On the other hand, some of the
responses are more difficult to compare directly to the theory sources. Despite good
understanding of principal-agent and contract issues, there were some differences
between the questionnaire and the theories. Theorists views are more or less similar to
the answers of questionnaire. Due to the shared understanding arising from the review
of literature and questionnaire results, the biggest issue is the implementation of modern
views in practice. The questionnaire indicates clearly that there is a close connection
with the questionnaire answers and the theorists’ views presented in the review of
literature of this thesis.

When analysing Table 2, in Appendix 6, it should be noticed how it is related to the

research questions the theorists mentioned in table 2 have introduced views and
perspectives in review of literature, which are more or less in line with the questionnaire
responses. Most of the theorists’ views are rather modern, in 2010s, but the following
theorists are more traditional in their opinions: Jensen & Meckling (1976), Ross (1973),
Mitnick (1974a) and Fama (1980). In this decade researchers like Sannikov (2007),
Dennis et.al. (2009), Ward and Filatotchev (2010), Fulmer & Nyberg (2010), Ojo’s
(2013), Afzalur (2013), Sebald and Walzl (2014), Helgesson (2015), Hart and
Holmström (2016), Kolbjørnsrud (2017).

Concerning RQ1, which asks, what good incentive tools there are to remunerate agents,
the answers show that questions 4 and 8 best relate to this research question. In question
4, most of the respondents, 76 %, answered “very well” or “somewhat well” and 13 %
of the respondents were neutral. Other options weren’t significant. In question 8. two
of three respondents answered that the CEO is “very well committed” or “somewhat
committed”. What is significant is that one of three respondents are of the opposite
opinion. 18 % of the respondents were neutral, which is quite a high rate. The theorists
whose views are in line with these answers can be found in Appendix 6.

44
Continuing with RQ2, which focuses on how remuneration policies support agents’
commitment to the company, the answers to questionnaire questions 3, 4, 8 and 10 all
give reasons that are found behind the remuneration issue. In question 3, a significant
majority, 81 % of the respondents, argued that the agent is committed to the owners’
will “very well” or “somewhat well”. 13 % of the respondents were of the neutral
opinion. Other responses weren’t significant. In question 4, most of the respondents, 76
% of the total number, answered that the managing director is well committed to the
will of the owners, the neutral opinion was put forward by 13 % of the respondents. In
question 8, two of three respondents answered that the board of directors has succeeded
in making the managing director committed to the will of the owners. 18 % of the
respondents were of the Neutral opinion, and in this question, it is a high rate. In
question 10, a plurality of respondents, 39 %, argued that they have not enough
knowledge about contract theory issues. Based on this question, most of the work needs
to be done in the areas of implementing knowledge in practice and handling the
remuneration issues in companies’ boards. Therefore, RQ2 is linked to questionnaire
questions 3, 4, 8 and 10 directly. The theorists whose views are in line with these
answers can be found in Appendix 6.

The goal of RQ3 was to examine what kind of methods today’s boards should use in
the interaction between principals and agents. Question 9 answers best this research
question. In this particular question most of the respondents, 64 %, answered that
companies have used a variety of methods to reward their agent. 20 % of the
respondents, however, think the opposite. The neutral stand was taken by 14 % of the
respondents. The theorists whose views are in line with these answers can be found in
Appendix 6.

The last research question, RQ4, aimed at finding out whether the relationship between
principals and agents has economic influence on the company’s performance. In the
answers for question 7, there is evidence that the relationship between principals and
agent has economic influences. Nearly three of four, 74 % of the respondents, see that
there is positive correlation between the quality of principals and agents’ relationship
and the company’s economic success. The theorists whose views are in line with these
answers can be found in Appendix 6.

45
Comparing the answers for question 4 with the interviews, it can be confirmed that there
is a shared opinion that the managing director have to commit to the will of the owners.
In question 6, a clear outcome is that further and deeper research must be done in order
to clarify the root causes of why some of the respondents see the principal-agent issues
so differently. Both interviews and questions 7. and 9. in the multiple-choice
questionnaire show that remuneration issues are very important and the board of
directors put a great amount of effort into the matter of making the managing director
tightly committed to the owners’ will and the company. It was expected in the last
question that it is the most difficult one to understand or to ask from the respondents.
Contract theory issues are not as familiar as principal-agent theory issues, but progress
has happened.

3.8 Limitations of this master’s thesis

There are only few theses, articles and dissertations written in Finland, where the topic
is even touched upon because expert interviews and surveys were conducted mostly in
organizations abroad and not in Finnish ones. This limitation of this thesis may be its
narrow view of the Finnish context of corporations’ situation in implementing the
principal-agent theory in practice.

The methods used could also be seen as a limitation, especially the qualitative
interviews, which represent only two separate views of Finnish board professionals.
Nevertheless, both of them represent the top influencer of their association and they
have sat in many boards in Finland and of significant companies, too. Conducting a
larger number of interviews in this branch might have increased the generalizability of
the results and make them fully comparable, and therefore given more validity to the
thesis.

SurveyMonkey platform had some limitations related to the respondent number in the
freeware version. Only 100 responses were allowed in that version to accomplish
diagrams and other raw data by the programme. However, the respondent number
limitation was not a significant factor because there were exactly 100 answers anyway

46
for the questionnaire. But in a larger-scale study, if there were more respondents, it
would become an issue that needed to be solved. It could be seen as a limitation, too,
that there were no demographic questions either in the questionnaire or in the
interviews.

One disadvantage may be that the questionnaire was made in Eastern time, between 10
April and 21 April 2017, which may explain and contribute to a low respondent rate. In
addition, there were difficulties with time schedules, and making the questionnaire
within a reasonable time frame. The author is still very thankful for even this number
of respondents who answered and saw principal-agent and contract theory issues as so
important.

3.9 Future research

In the future, the importance of practical applications of principal-agent and contract

theories will rapidly grow, if the Finnish companies want to improve their knowledge
about board work and learn more about the relationships between principals and agents,
and therefore succeed better in the global market. Further research has to produce exact
information to all parties, both the companies and their owners in Finland.

For example, all local level studies in the Finnish Chamber of Commerce must be one
of the future investigation areas. All Chamber of commerce’s in Finland should be
researched in the future. Enlarging the scope of empirical research area could also
benefit the whole society. The member companies of Helsinki chamber of commerce
could take advantage of this research and make improvements, in the case of the
questions that implied that the level of knowledge is not very high.

The author has focused in his master’s thesis on the corporations, but the modern
concept of principal-agent theory includes also the public sphere of society, which
should also improve and develop further through taking into account principal-agent
and contract theories’ aspects. From the theoretical point of view, an alternative solution
for contract theory could be using ownership strategy to replace it, as a tool of corporate
governance as Wahl (2015) has suggested. Mathematically separated principal-agent

47
question to two different matters is one of the most interesting research views as
Helgesson (2015) states in his doctoral dissertation and underlines that remuneration
matters should be tied to the game-theory model to fill up contract possibly well.
Severance agreement has been researched more by Cowen et al. (2016), and it is vital
for the continuation of discussion. The public sector should research and share
information in this area, too, as Higgs (2018) points out. These already existing theories
could also be researched in the Finnish context in the future, and the focus should be on
stakeholder aspects via contract and principal-agent theories. In the opinion of the
author, all these views represent the most important lines for future research.

48
 CONCLUSION

The recent Nobel prize in economics 2016 awarded to Bengt Holmström and Oliver
Hart has inspired the author to research the principal-agent and contract theory issues
more. The purpose of this thesis was to figure out the current situation concerning the
knowledge about principal-agent and contract theory issues in Helsinki chamber of
commerce member companies. In addition, to study the views of experienced chairs,
the author made two interviews with chairmen of boards, Mr Eloranta and Mr. Aminoff.
Their views are more or less in line with the questionnaire responses.

Comparing critical, opposite and different views of principal-agent and contract

theories is essential in this thesis. On the practical side, the results could be exploited in
improving business actions in corporations. The general knowledge of theoretical
background has improved in companies and more attention is given to these matters.
Previous studies have concentrated on this specific topic mainly in the context of large
multinational corporations and not much in Finland. Now there is information available
for Helsinki Chamber of Commerce member companies on how to implement the
theories in practice as well as development ideas and advice. A reasonable amount of
data was successfully collected, and it is representative of how principal-agent issues
are generally understood in these companies. In conclusion, the interviews and the
questionnaire answers give an overview of what has to be improved and also recent
information about how these matters are understood by companies’ top management
and board members.

The main results were that the majority of respondents knew what is meant by the
principal-agent concept in general. There is a strong shared understanding that the
owners’ will is implemented in firms and agents are committed to owners’ decisions.
There are only few conflicts and there is no doubt about the relationship between
principals and agents having economic influence. The rewarding methods are versatile,
but the contract issues are not as familiar as the principal-agent issues are. Two

49
chairmen of board, Mr. Eloranta and Mr. Aminoff, were more or less of the same
opinion with the respondents of the questionnaire.

The main conclusion was that real-life examples equal to literature research examples.
Both interviewees’ opinions are also in line with each other very well. The theory was
compared to questionnaire results and the interviews were juxtaposed with each other.

For future, the author suggests that Helsinki Chamber of Commerce member companies
should organize training related to principal-agent and contract theory issues. The
results of the questionnaire should be carefully taken into account in decision making
processes. In the opinion of the author, the results of the questionnaire should be used
for educational purposes to improve knowledge about these matters.

Making this thesis has been an interesting and educative process, where the author has
used all possible ways to achieve the final goal: to get the master’s thesis ready on time.
Hopefully, this thesis could be used in practice and the results could be implemented in
companies’ daily operations.

50
 GLOSSARY

Agent – the notion of the person, who is hired managing director of the company. Agent
has legal contract to make business decisions on behalf another person. In generally
agent is known for title CEO or managing director.

Board of Directors – Elected body by shareholders, which members represent the

owners will and govern the company. Determines the business branch and company
strategy. Hire managing director and other members of management board.

CEO duality – the problem that same person is managing director and chairman of
board at same time. Not allowed in listed companies anymore in Finland, more common
in USA. Duality position may raise power and responsibility questions between
objective governance of company.

Code of conducts – approach to social norms, which have been written for employees
by company. There is determined usually responsibilities, values, rules, standards,
expected behaviour, ethical issues, moral codes and religious “company laws”, which
are based on their own values and decisions. It is widely used in modern companies and
its purpose is creating common corporate culture to company.

Contract – a study of how managing director should remunerate to bound him or her
tighter to company. Purpose is also to study what methods are best to provide best
possible result toward the company. Generally connected with law and economic issues,
not so specially in leadership issue.

Game theory – concept of mathematical model, in which agents try to co-operate and
influence conflict between each other’s. Rational decision making is essential in this
theory. There are implications on economics and in this thesis its application is
framework decision making of board work. Founder of this model was John Nash.

Incentive – term of remuneration issue of agent, which is contracted by board of

directors on behalf of principals to supervise owner’s benefits. Could be financial or

51
immaterial, usually tight on firms’ outcome of revenue or other financial numbers.
Purpose is to produce greater effort toward company and its owners.

Management board – Hired top-management of company. They act on behalf of

principals to searching company’s best, in point shareholders view. Generally, CEO
and few other top-managers formed highest decision-making institution in company.
Board of directors usually nominates Management Board.

Moral Hazard – a study of how agent does not represent principals will. Sometimes
managing director may have opposite interest, what principals have. When managing
director do short-term solution in business, even it is bad for long-term period, are
common in Moral Hazard situation in firms and cause conflicts of interests.

Principal – the notion, who is the owner of the company. Primary investor of company.
They may be various of number of principals in one company. Principals will should be
rule and order in company’s decision making.

Remuneration – System, how hired managing director and other top-management are
rewarded. Remuneration system is usually treated in companies’ boards, which
represent view of owners. Included varies of elements like: annual salary, bonuses,
option programs, immaterial-rewards, services, fringe benefits etc. May mixed all or
some of those for certain time period.

Shareholders – The stockowners, who owns either private or public company. They
are owners of the company. They are responsible only for amount they have invested in
the company. They have right to vote and elect board of directors.

Shareholder agreement – the notion that it is agreement between shareholder and a

company. It determines shareholders’ rights and obligations. It orders how company
should manage, defines the ownership of shares. Privileges and protection of
shareholders are also determined in Shareholder agreement. It is strictly binding
contract; its purpose is guarantee equal treatment of all shareholders.

52
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about Qualitative Research. London: Sage.

Wahl, F. 2015. International Journal of Business and Social Research, 5 (9), 93-99.
Strategic Audit and Ownership Strategy.

Ward, D. and Filatotchev, I. 2009. Bradford University School of Management and

CASS Business school. Managerial and decision economics. Manage. Decis. Econ.
31, 249–261 (2010). Published online 14 June 2009 in Wiley InterScience. Principal–
Principal–Agency Relationships and the Role of External Governance.

Yu, E. 2013. Former CEO admits errors led to Nokia downfall. ZDNet. October 18,
2013.

Zikmund, W. 2000. Business Research Methods. (6th edn). Forth Worth, TX: Dryden
Press.

58
APPENDIXES

59
Appendix 1. Cover letter

Dear respondent. This is a quantitative survey; which aim is Principal-Agent and

Contract theories applied to Capital economic area with help of Helsinki region
Chamber of Commerce member companies. Survey is produced by Ville Kartaslammi,
student at Estonian Business School. Original survey is in Finnish, but author will
translate it to English. Survey is anonymous and all answers will be handled with trust
and cannot be allocated to any of the companies. Survey is implemented with help of
SurveyMonkey-page in Internet. Research purpose is search how Principal-Agent
issues are known in Helsinki area. Survey’s idea is produce relevant information to
association organization to Helsinki region companies and serve community. There is
also purpose to give advices based on results to develop good corporate governance
practises.

To clarify respondents what following concepts means, author will explain Principal-
Agent and Contract theory terms. In this context, Principal-Agent will be defined as
principal is owner of the company and agent is CEO of the company. Authors purpose
is clarifying relationships between those parties with questionnaire and search role of
board between these two parties. Contract theory is in this context, how CEO’s
remuneration is handled and how well it is organized to support owners will.

There are open text fields, where respondent could answer more widely and argument
why some issue is like it is. All questions are generally based on development questions
of good corporate governance habits in Helsinki region.

There is one-week time to answer 10.4.2017-21.4.2017. Here is the link to

questionnaire: https://fi.surveymonkey.com/r/KGCPQKG

Thank you for answers!

With best regards,

Ville Kartaslammi

60
 Appendix 2. Multiple-choice questionnaire

All questions are in the 5-step Likert scale form, and there is also an “I cannot say”
option. There is also open comment field, where the respondent can answer by clicking
the speech bubble sign and then the plus sign. After that it is possible to just write a
comment and press “publish”. All questions have to be answered. Answers were mainly
hoped from the top management and members of boards. Figures that show the answers
are found in Appendix 3.

1. On the scale below, evaluate how good is the knowledge level of the managing
director concerning the principal-agent issues?

1. Very good
2. Somewhat good
3. Not particularly good, but not bad
4. Somewhat bad
5. Very bad
6. I cannot say

2. On the scale below, evaluate how well the general knowledge of principal-agent
issues has spread in Helsinki region companies?

1. Very widespread
2. Fairly widespread
3. Somewhat spread
4. Not very widespread
5. Not at all widespread
6. I cannot say

3. On the scale below, evaluate how well the company’s board of directors has
implemented the will of the owners?

1. Very well

61
2. Somewhat well
3. Nor particularly well, but not badly
4. Somewhat badly
5. Very badly
6. I cannot say

4. On the scale below, evaluate how well the managing directors cling to the will of
the owners?

1. Very well
2. Somewhat well
3. Not particularly well, but not badly
4. Somewhat badly
5. Very badly
6. I cannot say

5. On the scale below, evaluate how often the principal-agent issues arise in conflict
situations between the owners and managing directors?

1. Very often
2. Somewhat often
3. Not particularly often, but not the least
4. Rarely
5. Not at all
6. I cannot say

6. On the scale below, evaluate how often there are collisions and
misunderstandings in companies in terms of principal-agent theory to change good
corporate governance habits?

1. Very often
2. Somewhat often
3. Not particularly often, but not the least
4. Rarely
5. Not at all

62
6. I cannot say

7. On the scale below, evaluate what kind of economic influence relationships

between managing directors and owners can have?

1. Very large-scale effects

2. Some effects
3. No effect one way or another
4. Not much impact
5. Not at all
6. I cannot say

8. On the scale below, evaluate how well the company’s board of directors has
made the managing director cling to the will of the owners? Is the managing
director

1. Very well committed

2. Somewhat committed
3. Not committed one way or another
4. Not much committed
5. Not at all committed
6. I cannot say

9. How diversely the company's board of directors has used a variety of reward
methods in order to enhance the managing director’s commitment to the
company by using the scale below?

1. Extremely diversely used

2. Somehow used
3. It is not used in either way
4. Not much used
5. Not at all used
6. I cannot say

63
 10. How well the contract theory issues are known in companies by using the
scale below in evaluating?

1. Very well
2. Somewhat well
3. Not particularly well, but not badly
4. Somewhat badly
5. Very badly
6. I cannot say

64
Appendix 3. Multiple-choice questionnaire answers

1. Evaluate the scale below, how good knowledge is the managing

director of the Principal-Agent issues?
55
60
Respondent amount

50

40

30 21
15
20
5 3
10 1
0
1. Very good 2. Somehow 3. Not 4. Somehow 5. Very bad 6. I cannot
good particularly bad say
good, but
not bad

Figure 1.

2. Evaluate the scale below, how well common knowledge of

Principal-Agent issues have spread in Helsinki region companies?

60 51
50
Respondent amount

40 32
30

20 11
10 3 2 1
0
1. Very 2. Fairly 3. Spread 4. Not very 5. Not at all 6. A cannot
widespread widespread Somehow widespread widespread say

Figure 2.

65
 3. Evaluate the scale below, how well board the company’s board
of directors implement the will of the owners?
45
45
Respondent amount
40 36
35
30
25
20
15 11
10 3 3 2
5
0
1. Very good 2. Somehow 3. Not 4. Somehow 5. Very bad 6. I cannot
good particularly bad say
good, but
not bad

Figure 3.

4. Evaluate the scale below, how well managing directors are

bound to will of owners?
40
40 36
35
Respondent amount

30
25
20
13
15
10 5
4
2
5
0
1. Very good 2. Somehow 3. Not 4. Somehow 5. Very bad 6. I cannot
good particularly bad say
good, but
not bad

Figure 4.

66
 5. Evaluate the scale below, how much Principal-Agent issues
arise in conflict situation between the owners and managing
directors?
35
Respondent amount 35
30
25 20
20 15
12 13
15
10 5
5
0
1. Very much 2. Somewhat 3. Not 4. Rarely 5. Not at all 6. I cannot
particularly say
much, but
not the least

Figure 5.

6. Evaluate the scale below, how much in companies have

collisions and misunderstandings in terms of Principal-Agent
theory to change good corporate governance habits?
43
45
Respondent amount

40
35
30
25 20
20 14
11
15 8
10 4
5
0
1. Very much 2. Somewhat 3. Not 4. Rarely 5. Not at all 6. I cannot
particularly say
much, but
not the least

Figure 6.

67
 7. Evaluate the scale below, what kind of economic influence have
relationships between managing directors and owners may be?
60 54
Respondent amount 50

40

30
20
20
9 10
10 5
2

0
1. Very 2. Some 3. No effect 4. Not much 5. Not at all 6. I cannot
large-scale effects one way or impact say
effects another

Figure 7.

8. Evaluate the scale below, how well company’s board of

directors have bound managing director to will of the owners?
44
45
40
Respondent amount

35
30
22
25 18
20
15 10
10 5
5 1
0
1. Very well 2. Somehow 3. It is not to 4. Not much 5. Not at all 6. I cannot
committed committed commit one committed committed say
way or
another

Figure 8.

68
 9. How diversely the company's Board of Directors have used
variety of reward methods to in order to enhance managing
director’s commitment to the company by using the scale below?

41
45
40
Respondent amount

35
30 23
25
20 14 12
15 8
10 2
5
0
1. Extremely 2. Somehow 3. It is not 4. Not much 5. Not at all 6. I cannot
diversely used used in used used say
used either way

Figure 9.

10. How well Contract-theory issues are known in companies by

using below scale to evaluate?

29 28
30

25
Respondent amount

18
20

15 11
9
10
5
5

0
1. Very good 2. Somehow 3. Not 4. Somehow 5. Very bad 6. I cannot
good particularly bad say
good, but
not bad

Figure 10.

69
Appendix 4. Interviews of Chairman’s of boards

This qualitative interview section, semi-structured interview of Philip Aminoff and

Jorma Eloranta. First mentioned is chairman of Director’s Institute of Finland and Veho
car seller company. Second mentioned is chairman of Neste and Stora Enso. Questions
are semi-open and answers will be disclosed in narrative form and in-depth style is used
throughout interview.

1. What are the major conflict areas, which arise today´s Board work?
2. How Principals and Agents will be faced or improve their Board knowledge and
know-how by identifying the possible conflict situations?
3. What are the misunderstandings and possible collisions of interest in generally related
to Principal-Agent relationship in Corporate Governance issues?
4. What they could do to improve current situation, if they change the conditions or
rules?
5. How do you see general knowledge is spread in Finland regarding Principal-Agent
theory?
6. How Contract theory issues are reflected in discussion generally?
7. What are good incentive tools to remunerate agents?
8. How agents should tie to owners will and desire?
9. What kind of tools today’s boards will use in discussion between Principals and
Agents?
10. Do you ever had tried game-theory implementations to practice contract or
Principal-Agent issues?
11. How do you see CEO’s duality position in stock listed companies?
12. How do you see, how good is Finnish Corporate Governance model in Finnish
context?
13. Is there influence on economic performance by Principals and Agents relationship?
14. What criticism you have faced in board work regarding Principal-Agent and
Contract theories?
15. What might be top-trends in future regarding Principal-Agent theory and Contract
theory?

70
Appendix 5. Comparing interviews to theory

The following table describes the similarities and differences between the theory and
the interview answers. The names of theorists and their studies’ publication year are
shown in the table. The theorists’ views are more or less in line with the interview results
and point to the same direction, observing and making suggestions to improve business
habits. Attention should be paid to both ideas presented in the review of literature and
to the responses of the qualitative survey, when doing development decisions
concerning corporate governance.

Table 1. Comparing interviews to theory. Composed by author.

Subject
1. What are the major conflict
areas, which arise in today´s board
work?
2. How Principals and Agents will
be faced or improve their Board
knowledge and know-how by
identifying the possible conflict
situations?
3. What are the misunderstandings
and possible collisions of interests
generally related to Principal-
Agent relationship in Corporate
Governance issues?
4. What could they do to improve
the current situation, if they
changed the conditions or rules?
5. How well-spread is the general
knowledge regarding Principal-
Agent theory in Finland?
6. How Contract theory issues are
reflected in discussion generally?
Theory
Sannikov (2007), Arthurs et.al
(2008), Kooskora (2008), Dennis
et.al (2009), Ward & Filatotchev
(2010), Fulmer & Nyberg (2010),
Foss and Klein (2016), Cowen et.al
(2016), Jalava (2017),
Kolbjørnsrud (2017), Higgs
(2018).
Jensen and Meckling (1976),
Fama’s (1980), Faynzilberg and
Kumar (2000), Sannikov (2007),
Dennis et.al. (2009), Ward and
Filatotchev (2010), Fulmer &
Nyberg (2010), Ojo’s (2013),
Afzalur (2013), Sebald and Walzl
(2014), Helgesson (2015), Hart and
Holmström (2016), Kolbjørnsrud
(2017).
Jensen and Meckling (1976),
Fama’s (1980), Faynzilberg and
Kumar (2000), Sannikov (2007),
Dennis et.al. (2009), Ward and
Filatotchev (2010), Fulmer &
Nyberg (2010), Ojo (2013),
Afzalur (2013), Sebald and Walzl
(2014), Helgesson (2015), Hart and
Holmström (2016), Kolbjørnsrud
(2017).
Jensen and Meckling (1976),
Fama’s (1980), Faynzilberg and
Kumar (2000), Sannikov (2007),
Dennis et.al. (2009), Ward and
Filatotchev (2010), Fulmer &
Nyberg (2010), Ojo’s (2013),
Afzalur (2013), Sebald and Walzl
(2014), Helgesson (2015), Hart and
Holmström (2016), Kolbjørnsrud
(2017).
Jensen & Meckling (1976), Fama
(1980), Ross (1973), (Mitnick
1974a), Mitnick (2007), Kooskora
(2008), Arthurs et.al (2008), Jalava
(2017).
Sannikov (2007), Faynzilberg and
Kumar (2000), Fulmer & Nyberg
(2010), Sebald and Walzl (2014),
Interviews
Different interests concerning the
company’s future between
principals and agents.
Discussion between owners and
board is the key in the opinion of
the interviewees. Dinners with the
owners and the board members
around the same table are a good
idea to get an overview of the
companies’ issues.
Boards’ independence is too high
today. Owners and board members
need to interact more. Taking risk
and its acceptance level are eternal
misunderstanding issues between
boards and principals. What is the
appropriate remuneration level for
agents is one these eternal
questions.
The chairman role has changed
during the past two decades into a
more professional one. The
increasing regulation of
governance may even have
negative effects, because the
bureaucracy has grown so much.
The theory itself is very well
spread. It is used all the time in
daily company governance.
Generally, well. There are mainly
traditional views about how agents
should be remunerated.

71

7. What are good incentive tools to
remunerate agents?
8. How the agents’ commitment to
the owners will and desire could be
facilitated?
9. What kind of tools today’s
boards should use in discussion
between Principals and Agents?
10. Have you ever tried
implementing the game theory in
practice in contract or Principal-
Agent issues?
11. How do you see the CEO’s
duality position in stock listed
companies?
12. How do you see, how good is
the Finnish Corporate Governance
model in the Finnish context?
13. Does the Principals and
Agents’ relationship influence the
economic performance?
14. What type of criticism have you
faced in board work regarding
Principal-Agent and Contract
theories?
15. What might be the top trends
regarding Principal-Agent theory
and Contract theory in the future?
Helgesson (2015), Cowen et.al
(2016).
Sannikov (2007), Faynzilberg and
Kumar (2000), Fulmer & Nyberg
(2010), Sebald and Walzl (2014),
Helgesson (2015), Cowen et.al
(2016).
Sannikov (2007), Faynzilberg and
Kumar (2000), Fulmer & Nyberg
(2010), Sebald and Walzl (2014),
Helgesson (2015), Cowen et.al
(2016).
Sannikov (2007), Faynzilberg and
Kumar (2000), Fulmer & Nyberg
(2010), Sebald and Walzl (2014),
Helgesson (2015), Cowen et.al
(2016).
Nash (1950), Helgesson (2015),
Foss and Klein (2016), Enicov
(2016).
Afzalur (2013), (Finnish Corporate
Governance Code 2015),
Finkelstein and D´aveni (1994),
Sebald and Walzl (2014), Dennis,
et. al. (2009), Ghosh, et. al. (2015).
European Observatory of Working
life (2011), Finnish Corporate
Governance Code 2015,
Hammarström Puhakka Partners”
(2016).
Dennis, et. al. (2009), Afzalur
(2013), Sebald and Walzl (2014),
Helgesson (2015), Hart and
Holmström (2016).
Ojo (2013), Finkelstein and
D´aveni (1994), Sannikov (2007),
Ward and Filatotchev (2010),
Ghosh et.al. (2015), Enicov (2016),
Cowen et.al. (2016).
Helgesson (2015), Enicov (2016),
Cowen et.al (2016), Kolbjørnsrud
(2017), Higgs (2018).
72
Mostly financial issues, but more
and more often also ethical and
environmental aspects.
Agents’ remuneration should make
them committed to their
company’s strategy and success.
They should also own shares to do
their best for the company.
A holistic thinking in all matters as
well as ethical issues are today’s
tools in discussion between
principals and agents in addition to
traditional strategical decision
making. To tie success in the
discussion of agent remuneration is
essential.
Both interviewees have done this,
but quite rarely. Today it is used
more than before. Three versions
of it should be present: the best,
middle and worse-case scenarios to
decide between alternatives.
Both interviewees agree that
duality position is not legal
anymore and that it is a good
practice to separate the decision-
making power.
In the opinion of the interviewees,
the Finnish corporate governance
model fits best to Finland due to the
cultural background and
legislation.
How much depends on the
relationship between the agent and
principals. Company’s economic
success should link to agent’s
remuneration issue closely.
Do those models really work in real
life? Stakeholders could have
different goals to govern company.
Sharing information to other
stakeholder groups could still be
improved. Invisible corruption
should be demolished in
companies.
Creating value to shareholders and
measuring it objectively, and
stakeholder policies as well as
ethical and environmental factors.
In multinational companies,
communication will rise in
importance.
 Appendix 6. Comparing questionnaire answers to theory

The following table describes the similarities and differences between the review of
literature and the questionnaire answers. The names of theorists and the publication year
of their studies are found in Table 2. Attention should be paid to both ideas in the review
of literature and the responses of the quantitative survey when doing development
decisions concerning corporate governance.

Table 2. Comparing questionnaire answers to theory. Composed by author.

Subject Theory
1. 1. On the scale below, evaluate
how good is the knowledge
level of the managing director
concerning the principal-agent
issues?
2. 2. On the scale below, evaluate
how well the general
knowledge of principal-agent
issues has spread in Helsinki
region companies?
3. 3. On the scale below, evaluate Sannikov (2007), Faynzilberg
how well the company’s board
of directors has implemented
the will of the owners?
4. On the scale below, evaluate
how well the managing
directors cling to the will of the
owners?
5. On the scale below, evaluate
how often the principal-agent
issues arise in conflict
situations between the owners
and managing directors?
6. On the scale below, evaluate
how often there are collisions
Questionnaire
Fama (1980), Finkelstein and
D´aveni (1994), Faynzilberg
and Kumar (2000), Arthurs
et.al. (2008), Dennis et.al.
(2009), Fulmer & Nyberg
(2010), Ojo (2013), Sebald and
Walzl (2014), García et.al.
(2015).
Jensen & Meckling (1976),
Fama (1980), Ross (1973),
(Mitnick 1974a), Mitnick
(2007), Kooskora (2008),
Arthurs et.al (2008), Jalava
(2017).
and Kumar (2000), Fulmer &
Nyberg (2010), Sebald and
Walzl (2014), Helgesson
(2015), Cowen et.al (2016).
Sannikov (2007), Faynzilberg
and Kumar (2000), Fulmer &
Nyberg (2010), Sebald and
Walzl (2014), Helgesson
(2015), Cowen et.al (2016).
Jensen and Meckling (1976),
Fama’s (1980), Faynzilberg
and Kumar (2000), Sannikov
(2007), Dennis et.al. (2009),
Ward and Filatotchev (2010),
Fulmer & Nyberg (2010), Ojo’s
(2013), Afzalur (2013), Sebald
and Walzl (2014), Helgesson
(2015), Hart and Holmström
(2016), Kolbjørnsrud (2017).
Jensen and Meckling (1976),
Fama’s (1980), Faynzilberg
The majority of respondents, 70
% has above average
knowledge of principal-agent
issues. Still one of five doesn’t
agree or disagrees.
A slight majority, 51 %, are
neutral, 32 % of the responses
indicate that it is somewhat
spread. However, the amount of
the extreme answers in both
ends of the scale is very small.
One of ten answers was “not
very spread”. The information
must certainly be spread more
effectively to member
companies.
A significant majority of
respondents, 81 %, evaluate
that the owners’ will is
implemented “very well” or
“somewhat well”. One of ten of
the respondents are still neutral.
Most of the respondents, 76 %,
answered “very well” or
“somewhat well” and 13 % of
the respondents were neutral.
Other options weren’t
significant.
In this question, the negative
answers are good, when
observing Likert-scale.
“Rarely” was selected by 35 %
and “not at all” by 20 % of the
respondents. The majority of
the respondents are neutral (55
%). Still 17 % of the
respondents see conflicts
happen either very much or
somewhat often.
The majority, 63 %, of the
respondents see “rarely” or “not

73
 and misunderstandings in
companies in terms of
principal-agent theory to
change good corporate
governance habits?
8. 7. On the scale below, evaluate
what kind of economic
influence the relationships
between managing directors
and owners can have?
7. 8. On the scale below, evaluate
how well the company’s board
of directors has made the
managing director cling to the
will of the owners? Is the
managing director: very well
committed, somewhat
committed, not committed one
way or another, not much
committed, not at all
committed, I cannot say.
9.
10. 9. How diversely the company's Sannikov (2007), Helgesson Most of the respondents, 64 %,
board of directors has used a
variety of reward methods in
order to enhance the managing
director’s commitment to the
company by using the scale
below?
10. How well the contract
theory issues are known in
companies by using the scale
below in evaluating?
and Kumar (2000), Sannikov
(2007), Dennis et.al. (2009),
Ward and Filatotchev (2010),
Fulmer & Nyberg (2010), Ojo’s
(2013), Afzalur (2013), Sebald
and Walzl (2014), Helgesson
(2015), Hart and Holmström
(2016), Kolbjørnsrud (2017).
Dennis, et. al. (2009), Afzalur
(2013), Sebald and Walzl
(2014), Helgesson (2015), Hart
and Holmström (2016),
Sannikov (2007), Faynzilberg
and Kumar (2000), Fulmer &
Nyberg (2010), Sebald and
Walzl (2014), Helgesson
(2015), Cowen et.al (2016).
(2015), Cowen, et. al. (2016),
Hart and Holmström (2016),
Foss and Klein (2016).
Sannikov (2007), Faynzilberg
and Kumar (2000), Fulmer &
Nyberg (2010), Sebald and
Walzl (2014), Helgesson
(2015), Cowen et.al (2016).
74
at all” collisions and
misunderstandings in
companies. 14 % of the
respondents were of neutral
opinion. However, 15 % of the
respondents still see collisions
and misunderstandings in
companies’ daily operation.
Nearly three of four
respondents, 74 %, answered
that there is economic influence
due to the relationship between
principals and agents. Thus,
there was totally 15 % of
respondents who did not see
any economic influence (“not
much impact” or “not at all”).
Two of three respondents
answered that the CEO is “very
well committed” or “somewhat
committed”. What is significant
is that one of three respondents
are of the opposite opinion. 18
% of the respondents were
neutral, which is quite a high
rate.
answered that companies have
used a variety of methods to
reward their agent. 20 % of the
respondents, however, think the
opposite. The neutral stand was
taken by 14 % of the
respondents.
A plurality of respondents, 39
%, answered that they have no
conception of this matter by
choosing either the “somewhat
badly” or “very badly” option.
The neutral opinion stand was
the most popular choice (29 %).
On the positive end of the scale,
there were 23 % of the
respondents. The respondent
rate of uncertain opinion was 9
%.
 SUMMARY (IN FINNISH)

Kartaslammi, V. ”Sopimus ja agenttiteoria: Käytäntö Helsingin kauppakamarin

alueella.” Maisterityö, Estonian Business School, Helsinki, 2018, 76 sivua, 6 kuvioita,
2 taulukkoa, 51 lähdettä, englanniksi.

PÄÄMIES-AGENTTI TEORIA, SOPIMUSTEORIA, OMISTAJUUSSTRATEGIA,

YRITYKSEN HALLITUS, OMISTAJAT, TOIMITUSJOHTAJA, KAKSOISROOLI,
OSAKKEENOMISTAJAT.

Viimeaikainen Nobel-palkinto 2016 vuodelta, jonka sai Bengt Holmström ja Oliver

Hart on innoittanut tekijää tämän aiheen kanssa. Tarkoitus on selvittää, kuinka päämies-
agenttiteoria ja sopimusteoria ymmärretään jäsenyrityksissä ja lisänä on kahden
Suomen hallitusammattilaisen haastattelut Suomen hallitusammattilaisten
yhdistyksestä. Elorannan ja Aminoffin näkemykset heijastelevat hyvin kyselyn
tuloksia. Teoriakatsaus esittelee tunnetuimmat näkemykset päämies-agenttiteoriasta ja
sopimusteoriasta. Uudempia näkemyksiä on otettu esille monipuolisesti ja myös
erilaisille näkemyksille teorian suhteen annetaan tilaa.

Internet-kysely ja kaksi haastattelua ovat tutkimustapoja, joilla tässä lopputyössä

tutkitaan päämies-agentti- ja sopimusteoria-asioita sekä kuinka ne on ymmärretty
yrityksissä ja hallitusammattilaisten näkemyksissä. Kysely tehtiin Helsingin
kauppakamarin jäsenyrityksien ylimmälle johdolle ja hallitusten puheenjohtajille.
Haastatteluita tehtiin kaksi Suomen hallitusammattilaisten pitkäaikaisille jäsenille,
jotka molemmat ovat merkittävissä asemissa eri yritysten hallitusten puheenjohtajina.

Tulokset osiossa vertaillaan saatuja tuloksia teoriaan nähden. Niiden pohjalta esitellään
johtopäätös, millaisia suosituksia toiminnan kehittämiselle annetaan tutkimuksessa
olleille sidosryhmille. Lopuksi on kattava aiheeseen liittyvä sanasto ja johtopäätöksissä
tekijä arvioi maisterityönsä arvoa tieteellisessä viitekehyksessä ja sen tuottamaa
uutuusarvoa suomalaiseen yritysmaailmaan sovellettavaksi.

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 Tuloksista käy ilmi, että suurin osa vastaajista tietää mitä päämies-agenttiteorialla
tarkoitetaan yleisesti. Vastaajilla on myös vahva yhteinen näkemys siitä, että omistajien
tahto toteutuu yrityksissä hyvin ja toimitusjohtaja on sidottu omistajien päätöksiin.
Konflikteja oli vain harvoissa vastauksissa, mutta ekonomista vaikutusta on erittäin
paljon sillä, minkälaiset suhteet omistajilla ja toimitusjohtajalla on. Palkitsemismalleja
on käytetty vaihtelevasti ja monipuolisesti, mutta sopimusteorian asiat eivät olleet niin
hyvin tunnettuja kuin päämies-agenttiteorian asiat olivat. Molemmat hallitusten
puheenjohtajat Eloranta ja Aminoff olivat enimmäkseen samaa mieltä kuin kyselyn
vastaukset.

Tulevaisuutta varten tekijä suosittelee Helsingin kauppakamarin jäsenyrityksiä

organisoimaan koulutuksen päämies-agentti ja sopimusteoria-asioista. Kyselyn tulokset
pitää ottaa vakavasti ja huomioida, kun tehdään päätöksiä. Tekijän mielestä tuloksia
kannattaa käyttää koulutustarkoituksissa, jotta tietämys näistä asioista lisääntyy.

Lopputyön tekeminen on ollut mielenkiintoinen ja opettava prosessi, jossa tekijä on

käyttänyt monia eri väyliä päästäkseen lopputulokseen: saada maisterityö ajoissa
valmiiksi. Toivottavasti, tätä lopputyötä voidaan hyödyntää käytännössä ja tuloksia
voitaisiin soveltaa yritysten päivittäisiin operaatioihin.

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