What is conflict?

Conflict is defined as an act of disagreement between two parties caused by uncertainties between them. The conflict has a negative outcome that affects both parties involved in the argument. Conflict arises when the parties' thoughts do not align or go in opposite directions. Conflicts have negative consequences for both the individual and the business. As a result, it should be avoided.

Causes of conflict

  • Inadequate and poor communication leads to misunderstandings between the parties, businesses, or shareholders.
  • Inadequate resource utilization and waste also contribute to conflict.
  • Fear, misunderstandings, a lack of trust, and other factors all contribute to conflict.
  • Cultural differences, personality differences, language barriers, different behavior, attitude, etc., are causes of conflict.
  • Conflict is caused by cultural differences, personality differences, language barriers, different behavior, attitude, and so on.
  • Complex organizational structure, target interdependence, unclear task, confusing work, and so on have a negative impact on workers and put them under pressure.
  • Because of the agency problem, it does not maximize workers' earnings and incentives.

Impacts of conflict

  • Health issues: It causes disorder among the conflicting parties, which causes a variety of health problems.
  • Lack of growth: It has an impact on the growth and development of a business organization.
  • Destroys relationship: The parties who are in conflict with each other end up with a ruined relationship.
  • Negative work environment: It distracts people from the business organization's healthy working environment.
  • Poor cash flow: Conflict has an impact on business activities and operations, resulting in a negative cash flow.
  • Poor reputation: It has a negative impact on the company's reputation in the eyes of its shareholders and stockholders.
  • Low incentives: Workers who are involved in a conflict in the workplace are given low incentives and compensation.

Types of conflict

  • Relationship conflict: Relationship conflict arises as a result of the parties' poor relationship.
  • Task conflict: The unachievable task creates a sense of conflict among the workers.
  • Process conflict: Work-related disagreements, such as when, how, what, and so on, should be resolved.
  • Status conflict: Status conflict arises as a result of inferiors and superiors, or positions in a business organization.
  • Environment conflict: Environmental conflicts are caused by a negative environment, a lack of security, and other factors.

Conflict agency problem and shareholder

Conflict among shareholders arises as a result of the business organization's failure to take the shareholders' interests into account. When shareholders receive lower returns on business profits, it creates a conflict of interest for the shareholder. Workers are paid more in salary and wages, resulting in low wealth for the business organization's shareholders and stockholders. When a manager uses the resources of a business for personal gain, it leads to conflict between the manager and the shareholder. Managers' unethical actions, such as temporarily increasing the price of a stock or displaying a high level of profits, have a negative impact on the trust and loyalty of shareholders and stockholders. The shareholder loses their cool and starts arguing, resulting in an agency problem.

How to resolve conflict?

The various methods to resolve a conflict are to do nothing or to address indirectly or addressing the issue directly or lastly exiting the relationship.
Methods to resolve conflict
  1. To do nothing: Ignoring the conflict and allowing it to continue.
  2. To address indirectly: To use active and passive conflict resolution strategies.
  3. To address directly: Taking a direct approach to problems and finding a solution to them.
  4. To exit relationship: To alter the elements of conflict and begin a new phase.

Managing agency conflict

The primary goal of managing agency conflict is to resolve conflict among parties or business organizations by employing various conflict resolution strategies. They protect the interests of the opposing parties and work to bring them together. They advocate for the development of healthy relationships and communication between parties and business organizations.

Pros of agency conflict

  • They aid in the resolution of uncertainties among the parties in a business organization.
  • They provide a solution by fostering mutual understanding among the company's employees.
  • They act as a go-between for the conflict parties and provide conflict resolution strategies.
  • They make decisions after taking into account all relevant factors.
  • They resolve the conflict in a way that benefits both parties.
  • They help to maximize returns and give employees the opportunity to earn incentives.

Cons of agency conflict

  • The agency conflict's decisions are inappropriate.
  • Sometimes the solution strategy benefits only one party.
  • While resolving conflict, agency conflict can take advantage of unfair advantages for personal gain.

Agency problem

The agency problem is a strategy in which one party safeguards the interests of the other. Because of differences in skills and the earning of incentives and compensation, an agency problem arises. Typically, agency issues have an impact on corporate governance because they are most commonly caused by stockholders, management, bondholders, or employees. In this case, one party acts on behalf of the other, and the incentives or returns generated by the act are not commensurate with the effort expended in performing the act.

  • Shareholder and management: When there is a disagreement between the two parties based on the activities of the board, it results in conflict if it does not match the shareholder's interests.
  • Shareholder and bondholders: A disagreement arises between the business organization's creditors, bondholders, and so on, and its shareholders.
  • Stockholder and another shareholder: A conflict arises between the business organization's employees, workers, suppliers, customers, and so on, and the shareholders.

Ways to manage the conflict

There are several ways to manage conflict. A few of them are avoiding conflict completely, defeating the other party, compromising, accommodating and collaborating.
Ways to manage conflict
  1. Avoiding: To avoid inter-party conflict or disagreements in the business environment.
  2. Defeating: To defeat the party by resolving the conflict and proving one of the parties correct.
  3. Compromising: With the help of mutual understanding, both parties involved in the conflict reach a compromise with each other.
  4. Accommodating: A strategy in which one party takes a step back and allows the other party to win the conflict.
  5. Collaborating: A strategy in which both parties collaborate and coordinate.

Conflict resolution agency

A conflict resolution party acts as a third party between the conflicting parties. Many business organizations hire a conflict resolution party that serves as a neutral third party between the disputing parties. Many businesses hire conflict resolution agencies to help them resolve disputes. They assist in identifying the source of the conflict, gathering relevant information about it, developing a conflict resolution strategy, implementing the strategy, measuring the outcomes, and taking corrective actions to close the gap. They are primarily concerned with achieving a win-win situation in which both parties involved, win the conflict. They look out for both parties and try to benefit them both. They bill the agency for the costs of resolving the conflict. The agency costs are determined by the nature of the conflict between the parties. If the conflict is simple to resolve, the agency fee is low. However, if a conflict is complicated and time-consuming, then the agency fee is high.

Features of conflict management

  • Conflict management is an ongoing process. It is dynamic and adaptable.
  • It necessitates a thorough examination and understanding of the situation.
  • It is management that is interdependent and interconnected.
  • It is a group of experts and professionals tasked with resolving conflict-related issues.

Agency problem and management

  • Organization: The agency is in charge of resolving conflicts within and between organizations.
  • Group: Agency manages conflict within and between group members.
  • Individual: Conflict is managed by the agency both within and between the individual parties.

Corporate finance and conflict

Conflict can arise in a variety of areas of corporate finance. It has an impact on the financial flow of the business.

The conflict affects financial transactions, financial instruments, securities, activities, operations, the financial market, and institutions, among other things. Frauds, unethical activities, incorrect financial balances, and other conflicts in corporate finance are all examples of conflicts. Corporate finance conflicts can be avoided by implementing effective conflict resolution strategies and agencies.

Corporate governance and conflict resolution

Corporate governance manages conflict by implementing effective conflict-avoidance strategies. They raise public awareness and disclose all legal rules and regulations, thereby preventing conflict. Corporate governance ensures that everyone is treated fairly and that the public's interests are protected. The audience receives welfare services from corporate governance.

Context and Applications

This topic is significant in the professional exams for both undergraduate courses & postgraduate courses and competitive exams, especially for:

  • Master and Business Administration
  • Master of Commerce
  • Bachelor of Business Administration
  • Bachelor of Commerce

Practice Problems

Question 1: Which of the following helps to manage the conflict?

a. Defeating

b. Collaborating

c. Compromising

d. All of the above

Answer: (d)

Explanation: Defeating, compromising, and collaboration are the correct ways to manage conflict. When one party is defeated, then the subject matter of the conflict has no relevance. Similarly, when compromise also solves the conflict that has been arisen. Collaboration also leads to the stoppage of conflict by agreeing on the subject matter.

Question 2: Who takes undue advantage of conflict for personal benefits?

a. Manager

b. Shareholder

c. Both a and b

d. None of the above

Answer: (a)

Explanation: Managers can take advantage as they have the power in their hands.

Question 3: What is the role of conflict managing agency?

a. To resolve the conflict for personal benefit.

b. To resolve conflict by facilitating a negative environment.

c. To resolve the conflict, which provides benefit to both the parties.

d. All of the above.

Answer: (c)

Explanation: A conflict managing agency must work for the mutual benefit of both parties. They must focus on positive aspects and not work for their benefit.

Question 4: Which of the following is a type of conflict?

a. Task conflict

b. Status conflict

c. Relationship conflict

d. All of the above

Answer: (d)

Explanation: Task conflict arises in the business, while status and relationship conflict can arise due to informal relationships.

Question 5: Why conflict managing agency is required?

a. To resolve conflict

b. To earn profit

c. To purchase product

d. To take training

Answer: (a)

Explanation: The purpose of the formation of the agency is to control the conflict. They are formed for the parties' conflict reduction.

Common Mistakes

Students make a blunder when it comes to understanding the concept of conflicts and problems. They are puzzled about the causes, effects, and consequences of the conflicts. They should also be aware of the role and characteristics of the conflict management and resolution agency.

While studying this topic, it is important to read the following topics to get a better knowledge:

  • Conflict management
  • Agency problems
  • Sources of conflicts
  • Business disputes

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