Principals-Agents' Conflict of Interest

The board carries out the duties in regard to the interest of the companies’ shareholders, staff,

1. Financial Publics: The Company’s Board of Directors, which is elected by the stockholders, is the ultimate decision-making body of the Company, except with respect to matters reserved to the stockholders. The Board selects the Chief Executive Officer and other senior executives of the Company, who are charged with directing the Company’s business. The primary function of the Board is oversight—defining and enforcing standards of accountability that enable executive management to execute their responsibilities fully and

As companies are artificial entities, those who are elected to manage them are acting in their directing mind and will. It appears that an outsider contracts with a company while it is the director who negotiate the contract and who make representations on behalf of the company. So it is essential that those who manage companies (directors) be engaged in appropriate duties.

Corporate governance is a set of actions used to handle the relationship between stakeholders by determining and controlling the strategic direction and performance of the organization. Corporate governance major concern is making sure that the strategic decisions are effective and that it paves the way towards strategic competitiveness. (Hitt, Ireland, Hoskisson, 2017, p. 310). In today’s corporation, the primary objective of corporate governance is to align top-level manager’s and stakeholders interest. That is why corporate governance is involved when there is a conflict of interest between with the owners, managers, and members of the board of directors (Hitt, Ireland, Hoskisson, 2017, p. 310-311).

There are a number of people that are critical to the corporate process. These include the directors of corporations, officers, and shareholders. The primary role of the directors is that of oversight (Loewenstein, 1998). The directors are hired by the shareholders, and their duty is to oversee the actions of the corporate executive. The directors hire the CEO and set his/her salary and benefits. The directors also play a role in oversight of the strategy and operations - this tells them about the merits of the executive that they have hired. Since Sarbanes-Oxley (SOX) was enacted, directors have seen their oversight role expanded (Skinner, 2006). There must be within the director group some financial experience to provide explicit financial oversight of the firm. The law prescribes certain committees as well, including audit and compensation committees, and SOX has also increased the liability that director's face, while expanding the role that directors play in the firm.

According to Nicole Busby, an agency is a contractual relationships that entitles one party to act on behalf, or in favour of, the other party in contractual arrangements with a third party. In this regardthese circumstances, the former is known as an “agent” and the entity on whose behalf the agent performs is called a “principal”.

An agency relationship is a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to the relationship are utility maximizers and they may have divergent goals and objectives, and there is good reason to believe that the agent will not always act in the best interests of the principal (Jensen, Michael C., and William H. Meckling. "Theory of the Firm, Managerial Behavior, Agency Costs, and Ownership Structure." Journal of Financial Economics 3 (October 1976), 305-360)

Information asymmetry, moral hazard, difference in attitude towards risk and difference in interest between shareholders versus directors are common agency problems that would usually be at the expense of shareholders (Mallin, 2007; Rahman, & Salim, 2010). For example, directors may have a wider range of economic and social needs (such as to maximize compensation, security, status and to boost their own reputation), while shareholders are interested only in maximizing return on investments. Furthermore, as directors are usually contracted to the company on short term basis, they may be eager for short-run payoffs within their contract term, whereas shareholders’ interest would be based on long-term success.

Hence, in this ethics paper, it explains and discourses about the approach taken to solve the ethical concerns or conflict among shareholders and firm managers known as agency problem or conflict.

The board of directors and management in companies respectively constitute a fatal role to control issues within a company so as to face the internationalization of real and financial markets that ease the boundaries of the business world and increase the corporation ‘s complexity and risks. While the responsibilities of senior management is to control the day-to-day business affairs to ensure the implementation of the strategies approved by the board, directors control the direction and goal of the company as well as establish the limits of management behaviour against management misconduct. In that respect, making a proper and explicit distinction between the function or duties of directors and senior management is an

The most common fiduciary duties are the requirements to act in the principal’s interest and the duty of honesty. For example, most company codes of conduct requires the board of directors and the management to carry out their duties with all necessary care and be truthful to the interests of the business establishment. This requirement goes line in line with the corporation law that terms this as interest of the company. The company’s interest, in that legal set up is all interests that the management has to consider when performing its duties on behalf of the

Companies are directed and controlled by a system known as corporate governance, in which boards of directors are responsible for governing their companies. The board of directors have responsibilities such as setting strategy aims for the company, supervising management and providing leadership. They must also report to the shareholders on their duties as directors. Their actions are subject to laws and regulations, as well as the shareholders in a general meeting. The shareholders appoint directors and auditors and must satisfy themselves that the structure in place to govern the company is adequate, (Financial Reporting Council, 2014).

This essay deals with the issues in corporate governance is a requirement for boards to consist of a majority of independent directors. Analysing the above mentioned statement the terms of the statements should be elaborated in detail for better understanding of the statement. This statement arise certain questions when an individual tries to understand it in depth. For example, what is corporate governance? What is the role of the board in legal context with regards to the above statement? What does the term independent director’ mean?

Agency problem was first mentioned by Berle and Means (1932) and has been since examined in both practice and academic literature. (3) Any contractual relationship, which one party (agent) promises to the other party (principle), is potentially subject to an agency problem. (11) In general, company’s ownership and control separate into three parties: the shareholders (principle), board of directors, and managers (agent). The shareholders are the owner of the entity and have the power to the operation profit and return of assets. The board of directors has the right to ratify and control the decision-making. The managers are responsible for the daily operations and execute decision made by the board of directors on behalf of the shareholders. Certainty, managers (agent) can collect information easier than shareholders (principle) do. If there is difference between the personal interests of agent and the goals of principles, the agency problem may present.(10) Agent can take advantage of power or information asymmetric to pursue its own interest instead of the best interest of principle.

The board 's key purpose is to ensure the company 's prosperity by collectively directing the company 's affairs, whilst meeting the appropriate interests of its shareholders and stakeholders. The objects of the company are defined in the Memorandum of Association and regulations are laid out in the Articles of Association.