Agency Relationship problems
There are instances reported in the newspaper where the CEOs are sent to jail due to serious lapse in Agency-relationship problem. You are one of the board members of a public listed company. Discuss how, you would implement the necessary safeguards to prevent such instances happening in your company.
1.0 Suggestions to resolve Agency relationship problems.
An agency relationship arises whenever individuals, known as principals, hire individuals, known as agents, to perform services and delegate decision-making authority to the agents.
The primary agency relationships in business are generally: (1) between stockholders and managers and (2) between debt holders and stockholders. When agency occurs it also tends to give rise to agency costs, which are expenses incurred in order to sustain an effective agency relationship (e.g. offering management performance bonuses to encourage managers to act in the shareholders' interests). Accordingly, agency theory has emerged as a dominant model in the financial economics literature, and is widely discussed in business ethics texts.
(http://www.referenceforbusiness.com/encyclopedia/A-Ar/Agency-Theory.html#ixzz1ZXkBdMuP)
1.1 CONFLICTS BETWEEN MANAGERS AND SHAREHOLDERS
Agency theory raises a fundamental problem in organizations—self-interested behavior. A corporation's managers may have personal goals that compete with the owner's goal of maximization of shareholder wealth. Since the shareholders authorize managers to administer the firm's assets, a potential conflict of interest exists between the two groups.
(Ref : Human Resource Management (Gaining a Competitive Advantage). 3rd Edition. By Noe, Hollenbeck, Gerhart, and Wright. Page 423 to 424)
1.1.2 SELF-INTERESTED BEHAVIOR
Suggests that, in imperfect labor and capital markets, managers will seek to maximize their own utility at the expense of corporate shareholders. Agents have the ability to operate in their own self-interest rather than in the best
1.0 Suggestions to resolve Agency relationship problems.
An agency relationship arises whenever individuals, known as principals, hire individuals, known as agents, to perform services and delegate decision-making authority to the agents.
The primary agency relationships in business are generally: (1) between stockholders and managers and (2) between debt holders and stockholders. When agency occurs it also tends to give rise to agency costs, which are expenses incurred in order to sustain an effective agency relationship (e.g. offering management performance bonuses to encourage managers to act in the shareholders' interests). Accordingly, agency theory has emerged as a dominant model in the financial economics literature, and is widely discussed in business ethics texts.
(http://www.referenceforbusiness.com/encyclopedia/A-Ar/Agency-Theory.html#ixzz1ZXkBdMuP)
1.1 CONFLICTS BETWEEN MANAGERS AND SHAREHOLDERS
Agency theory raises a fundamental problem in organizations—self-interested behavior. A corporation's managers may have personal goals that compete with the owner's goal of maximization of shareholder wealth. Since the shareholders authorize managers to administer the firm's assets, a potential conflict of interest exists between the two groups.
(Ref : Human Resource Management (Gaining a Competitive Advantage). 3rd Edition. By Noe, Hollenbeck, Gerhart, and Wright. Page 423 to 424)
1.1.2 SELF-INTERESTED BEHAVIOR
Suggests that, in imperfect labor and capital markets, managers will seek to maximize their own utility at the expense of corporate shareholders. Agents have the ability to operate in their own self-interest rather than in the best