The Agency Theory For The Best Interest Of The Shareholders

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).

Weisbach (1988), Heranlin and Weisbach (1991) examine agency theory and corporate governance .They observed that there is a positives relationship between firm performance and the proportion of outside directors sitting on the board. However, in the works of Forberg (1989), Weisbach (1991), Bhagat and Black (2002) and Sanda

In my review of A Primer on Corporate Governance by Cornelis A. de Kluyver I intend to examine, evaluate, and break down his key points. The book provides a general view on how corporations govern themselves, and the internal and external forces that effect and constrain them. The biggest external force is of course the US Government and the variety of laws and regulations imposed upon corporations. Internally, they are managed by the CEO and board of directors along with a set group of committees and corporate guidelines.

Our textbook defines an agency problem as a “conflict between the goals of a firm’s owners and its managers” (Megginson & Smart, 2009). It then defines agency costs as dollar costs that arise because of this conflict. In the corporate structure, stockholders are the owners of the firm, and they elect a board of directors to oversee the firm and help protect their investment. The board then hires the right corporate managers to run the firm with the goal of maximizing the wealth of the

In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events

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

Self-interests is the central element of capitalism that ultimately has led to the principle-agent problem in various fields such as public corporation. The central element of capitalism, as part of the American society, is for individuals to serve in their best interests. Therefore, the capitalist’s culture has ultimately led to the principle-agent problem: when the agent, whose power was delegated by a principle, has motives other than acting in the best interests of the principle. In a public corporation, where the ownership is shared by numerous stockholders, the principle, they have to find an agent, such as managers, to operate the business. This problem can be demonstrated when executives, the agent, are trying to fulfill the corporate

The basis of which is described as a contractual relationship between an agent and a principal wherein the agent is engaged to act on behalf of principal, the presumption being that in such a relationship both parties act solely in their own interest which may not always be aligned. The theory is based on the belief that people are naturally greedy and self-serving and that the agents will not exercise the same level of care and diligence as they would were it their own property for which they were responsible for. The argument is made in the readings that this theory may be redundant in a modern context given the size of some organisations and the relevant distance that may now exist between the original principal and the agent, however the theory and the dilemma associated with it are the basis of a large proportion of corporate governance rules as efforts were made to have in place the required level of protection for principles.

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

Study (Wilkes, 2004) defines “good corporate governance is increasingly being seen as the hallmark of a well-run company”. According to the definition of Agency Theory corporate governance has an effect upon organization performance. In light of Agency Theory, a potential governance problem is incorporated into the corporate framework as a result of the partition of possession from control (Davis, Schoorman, & Donaldson, 1997). Organization issues develop when the firms’ managers with the obligation of speaking to the proprietors ' best advantages, seeks after self-enthusiasm rather that of the proprietor (Khongmalai, Tang, & Siengthai, 2009). As indicated (OECD, OECD Principles OF CORPORATE GOVERNANCE, 2004) and the Cadbury Report (Cadbury Committee, 1992) , good organization performance a consequence of good corporate governance.

Some individuals with large shareholdings may try to influence company policies. However, from the outside, without an accepted official position, little can be accomplished in spite of considerable effort if management is not persuaded (Kouskoula, 1998). From a shareholder 's viewpoint, not having any influence on companies may lead to conflicts of interest. For instance, shareholders could fear that some managers may seek to use the shareholder 's money for their own personal gains. When faced with such principal-agent problems, it becomes the role of senior management to find ways to motivate everyone else in the company. At that point, senior management become the principals and junior management and other employees are their agents (Brealey et al., 2005). Shareholders maintain a perspective of a growing company in order to receive a return on their investment, therefore increasing their value. Their viewpoints could be considered more narrowly personally beneficial on a financial aspect than the viewpoints of a financial manager.

As we know, a corporation is basically has three sets of interest, they are Managers, stockholders and creditors. Stockholders often have conflicts with both banks and managers, since their general priorities are different. Managers want quick profits that increase their own benefit, power and reputation, while shareholders are more interested in slow and steady growth all the time. And the purpose of agency theory is to identify the conflict point among corporate interest groups. Banks want to reduce risk while shareholders want to maximize profits reasonably. Managers also think about their own interest. The fact that modern corporations are based on these relations creates costs in that each group is trying to control the others. Therefor agency theory as a theory of corporate governance to help corporate alleviate the problems arising due to the separation of ownership and control.

The conflict between shareholders and managers will incur certain costs. Jensen and Meckling (1976) refer the associated costs to this agency problem as the agency costs and present three components of agency costs, including “the monitoring expenditures by the principal”, “the bonding expenditures by the agent” and “the residual loss”, which all incline to increase as the manager’s ownership declines. The monitoring expenditures are the costs of the principals to monitor or control the managers in order to limit the abnormal actions of the agent to make sure that the agent act for the principal’s interests. The bonding costs is paid to guarantee that the agent would not take any action which can be harmful to the principal or the principal will be compensated if such actions happen. The residual loss refers to the discrepancy between the principal’s welfare and the agent’s decisions despite the use of monitoring and bonding. Such costs are inevitable results of agency problem. Similar to the agency conflict within the firm between managers and shareholders, if information asymmetry exists between the firm and outside investors, agency conflict may also

Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by the board of Directors and the concerned committees for the company’s stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and social goals. Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the