Agency Problems and Effects of Conflicts on the Shareholders - Term Paper Example

? Shareholders and management The relationship between the management and shareholders is the prominent concern of business ethicists. Most of the ethicist believes that management executives are indebt to provide its shareholders the duties of loyalty and truthfulness. These fiduciary duties highlight the promise of the management with its shareholders to engage in fair dealing in order to avoid the disputes and conflicts. There are disputes that are observed among the management and shareholders on the bases of their interests known as Agency Problem (El-Shamy). In order to overcome these disputes certain information is remained confidential to the shareholders. This paper briefs about the agency problems and discusses effects of conflicts on the shareholders. It further provides information about the shareholder management to minimize these conflicts. An “agency problem” may occur when the principle (shareholders) hires an agent (management) to perform business activities. This is because of the reason that the conflicts between the interests among between the management and shareholder (Clark and Marois). The main objective of the company’s management and stakeholders is to maximize its profits. Disputes among the managers and shareholders are created on the bases of their interests. Shareholders may object the amount of incentives that is being paid to managers (Clark and Marois). If the information regarding the incentives and pays to the management is disclosed to its shareholders, it may decrease the net profit margin of the company. In certain cases it is ethical for the management to hide the internal information from its shareholders, mostly decision making, investment decisions (Clark and Marois). This is because of the reason that the shareholders are not aware of the internal issues of the management; this may involve the moral hazards, employment issues, suppliers matter etc. In case of agency problem certain information regarding the incentives may remain confidential with the shareholders in order to eliminate the possibilities of disputes. It is essential for the organization to maintain the interest its management and shareholders to pursue its objectives (Clark and Marois). Therefore, the management and shareholder shall work together to maximize its profits. The conflicts among the relationship between the management and shareholders may create obstacles to attain the objective and goals of the organization. Management is aware of the internal issues of the company, such as suppliers’ choices, employment regulation, incentives, investment decisions etc. whereas the entire shareholders are not aware of these internal concerns of the management (Clark and Marois). If any of them is in conflict it may create an obstacle for the organization to pursue its objectives. Secondly, the conflicts may arise the problems in the attitudes of the management and shareholders to have different attitude towards their work (El-Shamy). Management plays the major significant role to attain objective of the organization therefore, conflict among them may result in different attitude in the work (El-Shamy). It is essential for the organization to work with the mutual consent of management and shareholder therefore the management shall carefully identify the issues and resolve in order to keep both of them satisfied. Shareholder’s hire management to pursue its goals, In order to render their services (management) the principle has to bear certain costs also known as agency cost. Agency cost is paid by the shareholders pay to hire manager in order to act on its behalf (Clark and Marois). This is because of the reason that both have different interest, as the management has more information. These costs are inevitable within an organization, the cost may be spend to provide material incentives (increments, bonuses and stock options) and moral incentives for the management to execute their duties in interests of shareholders. Based on the organizational structure and the separation between ownership and management is the major challenge. There fore it is primary concerns for the stakeholders to provide maximize satisfaction to its management. There are four types of costs: 1. Monitoring According to Kathleen M Eisenhardt, Monitoring are the activities of the management to satisfy and maximize owner’s wealth’. It refers to the costs and the payments for the audits and the controlling measures that stakeholders pay in order to ensure that the management is working properly. 2. Bonding Organization pays to third part bonding company in order to compensate the financial losses due to dishonest acts of the management (Clark and Marois). Through this organization is able to protect itself from the consequences of the management. Example: Insurances 3. Opportunity Opportunity costs are resulted when the organization is not able to obtain results from its new opportunities. This may be because of the difficulties management faces I seizing the profitable investment such as organizational structure, hierarchy etc 4. Structuring Katheleen defines, “Structuring expenditure related to structuring managerial compensation to maximize owner’s wealth” (Clark and Marois). Structuring expenditures is the mechanism of the organization in order to classify the systematic manner to manage and control of expenditure information. It is essential for the organization to overcome the conflict among the management and shareholder. These conflicts can be overcome if the shareholders following four primary mechanism to motivate its managers to act in favor of stockholder’s interest: 1. Managerial Compensation Managerial compensation is a source that shall be rewarded to the managers in order to retain competency and to support managers’ interest with the stockholders. These compensations are disturbed among the manager according to their performance; it may be bonuses and company shares. 2. Direct intervention by stockholders Most of the company’s stock is withheld with the larges investing institution such as mutual funds and pensions (El-Shamy). These may also influenced long term commitment of managers with the organization. 3. Threat of firing The shareholders are authorized to re-elect new board of directors if they are not satisfied with the current management. This may allow the organization to influence and enhance firm’s operation. 4. Threat of takeover Shareholders are concerned to sustain share’s market price, if the current management fails to run the organization effectively (Clark and Marois). Shareholder may take considerable measures to bring their management in order to maintain stock price. Works Cited Clark, Ephraim and Bernard. Marois. Managing risk in international business: techniques and applications. Ny: International Thomson Business, 1996. Print. El-Shamy, Susan. Dynamic Induction: Games Activities and Ideas to Revitalize Your Employee Induction Proc. London: Gower Publishing, 2012. Print. Read More