Evaluation Of An Agency Problem

This paper will discuss the reasons why CEOs are not being overpaid. It will apply the utilitarian ethical principle to many a few aspects to CEO compensation and whether or not it is justifiable for such pay. The paper will look at whether or not their performance is justifiable for the pay because they play such a big role in the livelihood of the company along with the principle agency theory and how it is being addressed for the benefit of the shareholders and others involved with the company, the supply and demand of the CEOs, and the paper will describe the comparison of other professions to help link the idea of CEOs being fairly compensated.

The scope of this paper is to analyze the kind of agency problems that emerges between The Hershey Company and their stakeholders and shareholders. To answer this, a review of the company`s board structure and ownership structure was made. Thereafter two specific situations that has occurred in recent times was used as case examples to enlighten the agency problems suggested to emerge by the corporate structure.

Corporate governance can address agency problems, they are the rules that dictate the company’s behavior towards it’s directors, managers, employees, shareholders, creditors, competitors and community.

Managers and shareholders are the utmost contributors of these conflicts, hence affecting the entire structural organization of a company, its managerial system and eventually to the company's societal responsibility. A corporation is well organized with stipulated division of responsibilities among the arms of the organizational structure, shareholders, directors, managers and corporate officers. However, conflicts between managers in most firms and shareholders have brought about agency problems. Shares and their trade have seen many companies rise to big investments. Shareholders keep the companies running

Most corporate financing decisions in practice reduce to a choice between debt and equity. The finance manager wishing to fund a new project, but reluctant to cut dividends or to make a rights issue, which leads to the decision of borrowing options. The issue with regards to shareholder objectives being met by the management in making financing decisions has come to become a major issue of recent times. This relates to understanding the concept of the agency problem. It deals with the separation of ownership and control of an organisation within a financial context. The financial manager can raise long-term funds internally, from the company’s cash flow, or externally, via the capital market, the market for funds

An agent is hired by the principal to perform some duty that benefits the needs of the principal. The agency problem is an issue that occurs when the agents use their authority to make decisions in their own interest at the expense of the principals. For example, company managers (agents) were put in place to make decisions that maximize the wealth of the shareholders (principals) but may instead engage in empire-building or may make inefficient company decisions for job security. In order to mitigate these potential agency problems, several mechanisms have evolved. These include directly tying the compensation of managers to the success of the firm; oversight and influence by the board of directors as well as outsiders such as security analysts, creditors, or large institutional investors; the threat of a proxy contest by unhappy shareholders to replace the current management team; or the threat of takeover by another firm. However, most of these mechanisms have a low chance of success or can create other problems. The best mechanism that prevents agency problems is the threat of takeover by another firm. If the

The evaluation of a large firm leads to a principle agent problems when the agent has the tendency to act in his own best interests instead of the interests of the principal. It can prove to be difficult to supervise the agent in a direct manner. For instance, if the compensation of the agent is connected directly to the sales revenues of an organization, the agent may attempt to increase sales revenues even if the profits of the company are reduced. There are problems when there is a conflict of interest between shareholders and management and the principle agent.

Agency theory is concerned with the agency relationships. The two parties have an agency relationship when they cooperate and engage in association wherein one party the principal delegates decisions and /or work to another an agent to act on its behalf (Tan & Lee, 2015). The important assumptions underlying agency theory is that potential goal conflicts exists between principals and agents; each party acts in its own self-interest; information asymmetry frequently exists between principals and agents; agents are more risk averse than the principal; and efficiency is the effectiveness criterion (Miller & Sardais, 2011; Kingston & Haijie, 2014). Two potential problems stemming from this assumption may arise in agency relationships: an agency problem and a risk sharing problem. An agency problem appears when agents’ goal differs from the principals’ and it is difficult or expensive to verify whether agents have appropriately performed the delegated work.

Conflicts between stockholders and creditors Conflict between shareholders and creditors is common for the company which use debt capital to form an optimum capital structure. As mentioned earlier, agency relation exist when one party works as an agent of the principal. In an organization management

Agency relationship refers to a consensual relationship between two parties, where one person or entity authorizes the other to act on his, her or its behalf, and they exist as mutual agreements between individuals, small firms and large organizations. Managerial opportunism is when managers use employer information for personal gain, this creates a conflict of interest, with self-serving managers making decisions that benefit them rather than the company owners or shareholders. Corporate governance problem deals with

Agency problem is a potential conflict between the agent and shareholders in the interest. It is shown that ownership is separated from management. This cause not only is the divergence of ownership and control, but also the information is asymmetrical. When ownership is separated

Economic science teaches us that due to their subjective needs, individuals have subjective preferences, and hence different interest. Occasionally different subjective interests give rise to conflicts of interest between contracting partners. These conflicts of interest may result in turn, in one or both parties undertaking actions that may be against the interest of the other contracting partner. The primary reason for the divergence of objectives between managers and shareholders has been attributed to separation of ownership (shareholders) and control (management) in corporations. As a consequence, agency problems

As explained by Schelker (2013), the agency problem between the owners and the management of a firm is at the heart of the corporate governance literature. Hence, there is a need for a

Q3. Author discussed Agency theory in this paper. Agency theory is root of corporate governance. Author look at recent research papers which has done vast research on the topics of, corporate governance, the relationship between firm performance and board size, board structure and characteristics.

This theory attributes the control for the best interest of the shareholders,it was introduced by Demsetz and Alchian (1972 )and was further improved by Meckling and Jensen ( Heslinda and Benedict,2009). The agency is a contract between the principal which are shareholders and the agent which are the managers .