Service provider and industrial customer’s opportunistic behaviors in the principal-agent-stakeholder triangle: A study on the role of registrar in ISO 9001 certification By Dr. Shaohan Cai* Associate Professor Sprott School of Business, Carleton University Dr. Minjoon Jun Professor Department of Management New Mexico State University

Service provider as a agent A service providers is often regarded as an agent in a principal-agent relationship, in which a principal (the client) delegates authority to the agent (the service provider) to perform some service on its behalf (Hill and Jones, 1992).Hill and Jones, 1992 when a service provider serves an industrial customer (i.e., a company), its performance not only affect the customer, but also various stakeholders of the customers.

principal-agent-stakeholder triangle for ISO 9001 certification

Potential conflicts of interest The registrars are paid by the firms that they are auditing. This creates a problem similar to that of the CRA, which rates the securities offered by firms but is also paid by the firms.

Stakeholders of the certification process Stakeholders may include an auditee’s trading partners, consumers, stockholders, creditors, local communities, etc. The stakeholders may refer to the certification when judging the auditee’s capability in quality management. Stakeholders can neither directly involve in the certification process nor influence it. Stakeholders are vulnerable to the opportunistic behaviors of the auditee and/or the registrar.

opportunistic behaviors in the triangle between the registrar and the auditee, the registrar may not make sufficient effort to assist the auditee in identifying the gap; between the auditee and the stakeholders, the auditee may attempt to obtain the certification without fully complying with the standard, which may hurt the interests of the stakeholders, especially the auditee’s customers; between the registrar and the stakeholders, the registrar may take a “profit-oriented and business- friendly” auditing approach to retain clients (Yeung and Mok, 2005).Yeung and Mok, 2005

Theoretical foundation-agency theory The classic agency theory suggests that the principal and the agent may not share common interests. The agent may take actions to maximize his own interest, but those actions may not enhance, sometimes even hurt, the principal’s interest. Thus, various mechanisms are needed to protect the interest of the principal, such as monitoring the agent’s behaviors, and behavior- or outcome– oriented contracts

Theoretical foundation-stakeholder theory Stakeholders are any individual or group having an interest in, or being affected by, the corporation. Those parties having a formal, official, or contractual relationship with a firm as primary stakeholders, and others as secondary stakeholders. Managers need to allocate their attention and resources to satisfy various stakeholders based on three key attributes : legitimacy, power, and urgency

The determinant of opportunistic behaviors-norms of conspiracy While explicit conspiracy between the auditee and the registrar could be rare, implicit conspiracy is often likely to occur. Norms are the expectations about behaviors that are at least partially shared by a group of decision makers Norms of conspiracy are shared expectation between registrar and auditor in terms of “easy auditing”.

The determinant of opportunistic behaviors- goal congruence and incongruence Motivation for a firm to adopt ISO 9001 could be broadly classified into two categories: (1)external pressure, such as government regulations, buyer demand, and competitors’ actions; and (2)internal needs to improve quality management practices

The determinant of opportunistic behaviors- goal congruence and incongruence If the audtiee seek to improve quality management performance, but the registrar focuses on profit only (do not make much effort to identify gaps), there is a goal incongruence and conflicts between two parties may arise

The determinant of opportunistic behaviors- goal congruence and incongruence If the audtiee seek for an easy auditing, but the registrar strictly enforces ISO standards, there is a goal incongruence and conflicts between two parties may arise

The determinant of opportunistic behaviors- goal congruence and incongruence If the audtiee seek for an easy aduiting, and the registrar focuses on profit only (do not make much effort to identify gaps), there is a goal congruence and norms of conspiracy may arise

Nature of exchange –information asymmetry Information asymmetry occurs when the principal cannot accurately observe the agent’s behavior or have difficulty to understand the knowledge utilized by the agent Asymmetry of information offers opportunities for a party to lie about its operations and capabilities.

Nature of exchange –information asymmetry Between the auditee and the registrar, information asymmetry of the auditee’s industry and operations is positively related to the auditee’s opportunistic behaviors. Between the auditee and the registrar, information asymmetry of the ISO 9001 standard is positively related to the registrar’s opportunistic behaviors.

Nature of exchange-dependence In the relationship between the auditee and the registrar firm, if the auditee is a large firm, which can spend a large amount of money on the training and certification, it becomes an important customer for the registrar firm. In this case, the risk of opportunistic behaviors also increases, since (1) the registrar may wish to sell more training programs to a rich client; and (2) the registrar is more likely to bend to the demand of the client by issuing an “easy certification”.

Conclusion During the ISO 9001 certification process, both the registrar firm and auditee could act opportunistically Country accrediting agencies need to do a better job in governing the certification process.