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Unethical Status (Ageincy Problem) - Case Study Example
Author : reynoldscade
Finance & Accounting
Pages 3 (753 words)
Agency problems arise because of conflicting interest of shareholders and the management or with lenders. Shareholder-management conflict occurs when managers use the resources of the company for their personal gains rather than pursue the interest of shareholders. …
Unethical Status (Ageincy Problem)
Agency relationship occurs when shareholders (principals) hire another person or persons (agents) to undertake certain duties on behalf of them (principals). Agency theory portrays the firm as a nexus of contracts between the holders of resources. This paper explores the type of conflict in the case, effect on stakeholders, type of costs involved and how to minimize the conflict.
Shareholder-Management Conflict: The case involves agency conflict between shareholders and the management. When managers hide some information from shareholders, an agency problem arises. A conflict ensues between shareholders and the managers of the organisation. Managers will most often try to pursue self-interest gains at the expense of shareholders in an imperfect market. According to agency theory, agency problem arises when managers put their self-interest goals before those of shareholders.The asymmetric flow of information in an imperfect market makes it possible for managers to pursue their self-interests rather than that of the organisation (Bhabatosh, 2008). For example, managers are usually in a better opposition to know the ability of the organisation to meet shareholders expectations than the shareholders. Because of uncertainties in the market, managers can always influence the outcome of the performance of the organisation. They can manipulate the results to be positive or negative in pursuit of self-interests. The conflict between shareholders arises when managers seek for deals that reduce the profit of the firm. For example, when managers seek for perquisites and pay rise, there may be a conflict between shareholders and the managers because this would most likely reduce the shareholder value. ...