Agency Problems
Agency problems refer to conflicts of interest that arise between principals (such as shareholders) and agents (such as company executives) when the agents' actions may not align with the best interests of the principals. These problems can occur due to information asymmetry, differing risk preferences, and the separation of ownership and control in a business. Resolving agency problems is crucial for ensuring effective corporate governance.
4 Key excerpts on "Agency Problems"
eBook - ePub- A. Ben-Ner, J. Montias, E. Neuberger(Authors)
- 2013(Publication Date)
- Routledge(Publisher)
...When their objectives diverge, principals may disagree on the contract offered to agents. They may also disagree on the choice of the organization’s structure. Another problem stems from individual incentives for free ridership in the exercise of control over agents. Each principal may expect others to commit resources for control, especially when individual returns are small in comparison to the cost of control. On the other hand, if all principals engage in control, there is likely to be considerable duplication of effort. The principal-agent problem has been typically cast with the agent in the role of the ‘villain’ who shirks and hides his activities from the principal. However, moral hazard and adverse selection problems may also affect the behavior of principals, and may also occur in the relations of agents with other agents and of principals with other principals. While the agency problem is usually formulated as the choice of the organizational structure that best promotes the interests of the principal, this focus may be unrealistic in situations where agents have sufficient countervailing power to alter the organizational structure set by principals. The conventional formulation of the principal-agent relationship commonly ignores the strategic nature of the interaction between principals and agents. Hence, while the principal-agent relationship is a convenient and very useful vehicle for introducing important ideas regarding behavior in organizations, it describes formally only one slice of organizational realities...
eBook - ePubAgency Theory and Executive Pay
The Remuneration Committee's Dilemma
- Alexander Pepper(Author)
- 2018(Publication Date)
- Palgrave Pivot(Publisher)
...Similar problems arise with common pool resources, like fisheries and forests, which require coordinated action by a consortium of community members to ensure protection for future use, in circumstances where an individual rent -seeking community member might seek to exploit the resource for their own selfish ends by breaking the rules of the consortium. These collective action problems faced by shareholders are examined in more detail in Chap. 4. One of the consequences of the dominant impact of agency theory on business thinking in the latter part of the twentieth century has been the focus on highly elaborate share -based incentive plans, often of baroque complexity, of which the philosopher Joseph Heath, in an article entitled, “The uses and abuses of agency theory”, says: “an enormous amount of time and energy has been frittered away designing increasingly clever incentives schemes, to the neglect of more obvious strategies for securing employee loyalty and dedication”. 17 One of the problems with long-term incentive plans is that they have not taken account of new thinking in the behavioural sciences. In Chap. 5, I examine the data and explain how psychological factors affecting the perception of risk, uncertainty, complexity, and time cause senior executives to undervalue long-term incentives, thereby contributing to inflation in executive pay. This chapter also examines the difference between extrinsic and intrinsic motivation and explains how intrinsic motivation can be undermined by extrinsic rewards. Notwithstanding the somewhat critical perspective of many parts of this book, agency theory has many strengths; it would not have dominated scholarly thinking about executive compensation for the last 30 years if it did not. The Oxford philosopher G.E...
eBook - ePub- Lucia Michela Daniele, Rémi Jardat, Jérôme Méric, Francesco Gangi(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
...It is an approach which provides for the existence of a contractual relationship under which a party (principal) instructs another party (agent), who agrees to perform a service on behalf of and in the interest of the former, in exchange for compensation. To undertake the service, it is necessary that the agent have a broad degree of decision-making autonomy (Jensen & Meckling, 1976). In general, this conceptual framework is potentially applicable to all those cases of social interaction in which there is a bilateral relationship between principal and executor within a cooperative effort. Given its configuration, the agency model as applied to the field of business theory and managerialism is distorted by the potential divergence of interests between the manager (agent) and the property (principal), as described by B&M (1932). By identifying the manager’s role as that of acting solely in the owner’s interest, B&M implicitly allow the possibility that such an alignment may not always hold well, because a manager could act in pursuit of personal gain, which might often conflict with that of the property (Berle & Means, 1932). Agency scholars, in obsessing over this dilemma, transform a potential risk into a form of recurrent opportunism inherent in a manager’s human nature, imagining solutions and penalties to contain the conflict of interest between principal and agent. In doing so, agency theorists, in their attempts to clarify what is the ‘black box’ we call a firm, assume that it is a form of legal fiction having an essentially contractual nature. The company is a nexus of contracts (Fama & Jensen, 1983); it is not an individual – so it would be misleading to assume that a company has a social responsibility (Jensen & Meckling, 1976). Managerial actions will tend towards safeguarding personal reputations by making unjustified social investment at the expense of the property (Barnea & Rubin, 2010)...
eBook - ePub- Stephen Bloomfield(Author)
- 2020(Publication Date)
- Routledge(Publisher)
...At the root of many corporate scandals are issues of agency in respect of pay. The Thomas Cook collapse is an example of directors acting as agents in their own capacity and that behaviour conflicting with the interests of the shareholders. Any accounting device (and there are many) which favours directorial reward over shareholder returns falls into the same category. Some of the proposals which supposedly ‘align shareholders’ interests’ with directorial pay are clearly conflicts of the agent’s responsibility. The shareholders have to trust the directors to work diligently and pursue the best interests of the company. This immediately gives rise to another problem: Who is to blame when things go wrong? That is not so much of a problem when the mistakes made are ones of strategy – costly though they may be. Theoretically the solution is for the shareholders to sack the director or directors and appoint new ones (although this is not so easy in a public company). What happens when a company’s actions break the law – perhaps when an effluent discharge pollutes a watercourse? Or if a faulty product results in the death or injury of a customer? Or if a worker is killed through unsafe working practices? Or, even more insidiously, when a service is offered to customers which is known by managers to be unethical but is undertaken nonetheless in the pursuit of profit? These issues have partly to do with the ‘agency problem’ but also involve issues of ‘the controlling mind’, which is considered later in this chapter. Who gets the rewards and in what proportions? Shareholders establish a company, by incorporation, for some economic purpose. That purpose is usually to increase their own wealth – to make money by supplying some form of need, expressed in the form of effective demand...
