GOAL AGENCY PROBLEM:- Ved Prakash panda

AGENCY PROBLEM• Conflicts of interest among stockholders and managers.

• AGENCY THEORY• The analysis of principal(stockholders)-agent(managers)

relationships.• One person, an agent, acts on behalf of another person, a

principal.

Agency costs• The cost of having an agent to take decisions for the

principal.• The agency problem arises due to the separation of

ownership and control of business firms.• In theory, the shareholders, being the owners of the firm ,

control its activities.• In practice, however, the large corporation with large and

fragmented set of shareholders is controlled by the directors.

• So, there is a separation of ownership and control.

• The separation of ownership and control raises worries that the management team may pursue objectives attractive to them.

• Which may not be beneficial to the shareholders.• This conflict is known as the principal- agent problem

( Agency problem).• The principals have to find ways of ensuring that their

agents act in their interests.

• It requires agency cost , which includes• i. Monitor managers behaviour• Ii. Create incentive schemes and control for managers to

pursue shareholders wealth maximisation.

Methods to achieve goal congruence• Various methods have been used to try to align the

actions of senior management with the interest of shareholders.

• 1. Linking rewards to shareholders wealth improvement• Owners can grant directors and other senior managers share options.• These permit the managers to purchase shares at a fixed date , with

a fixed price.• The managers under such a scheme have a clear interest to increase

the market price of the share.• An alternative method is to allot shares to managers if they achieve

certain performance targets, like growth in earning per share or return on investment,

2. Sackings• The threat of removing from job.• However this method is seldom used.

3.Selling shares and take-over threat• Most of the large shareholders ( specially institutional

investors ) sell the share rather than intervene.• This will result in a lower share price, making the raising

of funds more difficult.• If this process continues, the firm may need merger or

acquisition, resulting in a loss of top management post.

Corporate governance regulation• The companies act is designed to encourage directors to

act in shareholders interest.

Information flow• The stock exchange, regulating agencies like SEBI ,

investors, force firms to release more accurate , timely and detailed information concerning their operations.

• Company briefings and press announcements help to monitor firms, and identify any wealth – destroying actions by wayward managers early.