What is the Principal Agent problem, and should I be concerned about it in my local cooperative?

Cooperative manager groups, comprising the boards and managers, play a pivotal role in the success of cooperatives. However, what if their management performance deteriorates as a result of the Principal-Agent (PA) problem? The principal-agent problem highlights the inherent dilemma that emerges when an individual or entity (the principal) entrusts tasks or decisions to another party (the agent), who may prioritize their own interests over fulfilling the principal’s objectives, often stemming from information imbalances.

Should we be concerned about the possible PA problem in our local cooperatives? The short answer is “yes.” In fact, many existing studies have pointed out that cooperatives’ relationships between manager groups (the boards & managers) and members are actually more vulnerable than investor-oriented firms (IOFs). This is because while shareholders of IOFs can continuously monitor their management groups’ performance via external information, such as stock exchanges, cooperatives do not have a market for their equity, which hinders their members from monitoring the actions of their manager groups. 

Furthermore, the lack of monitoring from coop members may not only lead to a moral hazard where managers incentivize themselves, but might also intensify the adverse relationship between the boards and managers if they already had a hostile relationship. A recent study (Seo et al., in press) suggested some possible instances of internal governance issues and structural characteristics that may lead to such hostile relationships between the boards and managers. For example, the managers of agricultural cooperatives, who are also members of their cooperatives, tend to experience increased conflict despite the high level of loyalty towards their organizations. Because becoming a board member does not necessarily require board candidates to have accredited business management skills, the board of directors’ management knowledge, such as understanding of governance management or sector of supply chains, is often questioned (Park et al, 2019). In this situation, conflict may arise due to the board’s lack of perceived knowledge if board members attempt to over-manage managers’ boundaries. Moreover, if non-member board members, who potentially lack knowledge of their cooperative’s sector in the supply chain, influence cooperatives’ investment decisions, then conflict may arise in a similar way. This is why many existing studies emphasize the importance of cooperative board leadership training.

Though the PA problem is pervasive across almost every firm, existing studies have suggested some possible factors that alleviate the PA problem in cooperatives. Some potential solutions include enhancing social capital (trust), building favorable conditions that enhance the relationship between principals and agents, providing appropriate incentives for agents, and creating elaborate contract structures (i.e. laws and sophisticated contracts lead to human behaviors). Using one or more of these measures is recommended to create “anti-PA problem” environments in local cooperatives to prevent possible management performance loss and maximize manager groups’ performance.


Seo et al. 2024. Managers, Boards, and the Principal-Agent Problem in Cooperatives: A Survey 

of  Cooperative Managers in Texas. Accepted for publication in the Journal of Cooperatives on 30th. January, 2024.

Park et al. 2019. A Framework for Training and Assessment of the 21st Century Cooperative. 

Western Economics Forum. Volume 17,Issue Number 2. https://ageconsearch.umn.edu/record/298048/

Seo, Frank. “What is the Principal Agent problem, and should I be concerned about it in my local cooperative?Southern Ag Today 4(14.5). April 5, 2024. Permalink