Agent -Principal Conflict : Essay

Topics: Investment, Capital accumulation, Stock Pages: 2 (721 words) Published: January 10, 2011
Principal –agent conflict arise because managers & shareholders view the role of the corporation differently. Investors see corporation as investment vehicles. Shareholders want corporate managers to work diligently and efficiently towards the simple goal of maximizing the value of their ownership stake. However, the relationship between the managers of a corporation and its owners is complex. The principle of self-interested behavior tells that people, including managers and stockholders, work in their own financial self interest. This is considered the main source of divergence between a manager’s and an owner’s goals. Each wishes to maximize wealth and benefits, often at the expense of the other party. The modern corporation separates ownership and control giving rise to the principal-agent relationship. However, this separation gives managers an opportunity to work in their own self-interest. There are six different types of agency conflicts briefed below. Major source of manager-owner conflict is a behavior called shirking. Shirking is not putting forth the best effort to help stockholders realize the largest return possible. Perhaps managers are spending too much time enjoying perks and creating an opportunity cost of not working on projects and day-to-day operations. Whatever the reason, stockholders’ value decreases each time an opportunity for firm improvement is lost to shirking managers. Further, managers have different time horizons than the shareholders. The executives concerns largely on their tenure with the corporation, whereas shareholders concerns with value of infinite series of future cash flows. Another source of manager-owner conflict occurs when managers and employees hold unique skills necessary for business operations. The abilities and skills held by employees are collectively known as human capital. Just like investment capital, it defines what a company is capable of and often creates an important vehicle through which a company may...
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