Financial Ratios and Division Managers

Topics: Financial ratios, Financial ratio, Balance sheet Pages: 7 (2013 words) Published: November 11, 2010
A) The front desk receptionist routinely takes an extra 20 minutes of lunch to run personal errands.

Agency Problem: she took an extra 20 minutes to do her personal errands instead of working, which she puts her own self interests before the best interests of the company. Occurred cost: the salary that the company pays to her. The solution would depend on the boss on her work performance in the past. If she has an important personal errand to do during that time, then boss might need to talk to her and explain the solution for her. This problem can be final dealt by clocking-in and clocking-out even time for lunch hours.

B) Division managers are padding cost estimates so as to show short-term efficiency gains when the costs come in lower than the estimates.

Agency Problem: Division managers use their authority to mislead information and a problem exists when management and stockholders have conflicting ideas on how the company should be run in short-term. It will mess up the management in order to plan costs. Also it might ruin the number balance sheets and which could affect future gains. This might mean that the division managers who wish to engage in capital expenditures can now secure a short-term benefit from lower estimates. Occurred cost: The solution is management should monitor division managers performance and might give managers the performance shares which result in meeting the stated performance goals. These goals must be more efficient and accurate in order for management to plan goal to generate profit. Agency cost: By reducing and by providing appropriate incentives to align the interests to division managers.

C) The firm’s chief executive officer has secret talks with a competitor about the possibility of a merger in which he would become the CEO of the combined firms.

Agency Problem: The chief executive officer risks negative behavior because of dealing with the competition and did not involve his company’s best interests. He is putting his needs of planning a secret merger with his competition, which most likely can result potential profit for him, and possibly his company, if the merger is a positive one. Since he knows that his merger will occur (due to the fact of his direct “under the table” dealings with his competition), he can then go forward openly with his own company to promote the merger. Occurred cost: The CEO should know himself and the risks of CEO overconfidence. His behavior results in exactly this type of good faith mismanagement of the business. It is very important that the company should continue improving both legal and non-legal mechanisms that remedy conflict-of-interest problems by guarding against looting, fraud, and other forms of corporate corruption and disloyalty and by incentivizing managers to maximize shareholder value. The added challenge for corporate governance is to move beyond managerial motives to account more for human psychology and how managers actually behave and make business decisions when they are well-intentioned.

D) A branch manager lay off experienced fulltime employees and staffs customer service positions with part-time or temporary workers to lower employment costs and raise this year’s branch profit. The manager’s bonus is based on profitability.

Agency Problem: the branch manager created the personal goal to get more bonuses which depends on profitability and did not look into the company’s performance. Occurred cost: the management should be able to see that profitability does not come from sales. It comes from reducing the employment costs and should be explained to him in order to get the bonus. It is not just looking into the numbers, but it is many factors that come along with it. Also the manager should act in the best interests of the owners, not his personal affairs. It can be used the threat of takeover to discipline managers and so reduces the agency problems....
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