Principals-Agents' Conflict of Interest
Cynthia Claude
Nkono Moanang
1009040
CORPORATE GOVERNANCE AND BUSINESS ETHICS ASSIGNMENT
TOPIC: Principals (shareholders) – agent (managers) problem represents the conflict of interest between management and owners. For example, if shareholders cannot effectively monitor the managers’ behaviour, then managers may be tempted to use the firm’s assets for their own ends, all at the expenses of shareholders. Discuss the pros and cons of this statement with regard to duties of Board of Directors. Most organisations these days are no more owned by their managers. This separation of ownership and management gives rise to what is called agency relationship. Jensen and Meckling (1976) define the agency relationship as “a contract under which one party (the principal) engages another party (agent) to perform the some services on their behalf. As part of this, the principal will delegate some decision making authority to the agent “. However, it is important to mention that this relationship is not always peaceful and harmonious; rather, it usually raises some agency problems commonly called conflict of interests between shareholders and managers of the company. These conflicts occur when a person i.e. the manager has an obligation not to act in his own personal interest but in another person’s interest i.e. the shareholders. This means that in whatever situation, managers must prioritise shareholders’ benefits. But is this commitment always respected in principals-agents relationships? Hopefully, between these two groups, is the board of directors; directors who are elected by shareholders to act as their representatives by monitoring and controlling managers tasks and ensuring they are in line with shareholders’ expectations. With clear evidence that conflicts of interest are almost unavoidable in any agency relationships, an attempt will be made will be made to get an insight into that issue with regards to board of directors duties.
Nkono Moanang
1009040
CORPORATE GOVERNANCE AND BUSINESS ETHICS ASSIGNMENT
TOPIC: Principals (shareholders) – agent (managers) problem represents the conflict of interest between management and owners. For example, if shareholders cannot effectively monitor the managers’ behaviour, then managers may be tempted to use the firm’s assets for their own ends, all at the expenses of shareholders. Discuss the pros and cons of this statement with regard to duties of Board of Directors. Most organisations these days are no more owned by their managers. This separation of ownership and management gives rise to what is called agency relationship. Jensen and Meckling (1976) define the agency relationship as “a contract under which one party (the principal) engages another party (agent) to perform the some services on their behalf. As part of this, the principal will delegate some decision making authority to the agent “. However, it is important to mention that this relationship is not always peaceful and harmonious; rather, it usually raises some agency problems commonly called conflict of interests between shareholders and managers of the company. These conflicts occur when a person i.e. the manager has an obligation not to act in his own personal interest but in another person’s interest i.e. the shareholders. This means that in whatever situation, managers must prioritise shareholders’ benefits. But is this commitment always respected in principals-agents relationships? Hopefully, between these two groups, is the board of directors; directors who are elected by shareholders to act as their representatives by monitoring and controlling managers tasks and ensuring they are in line with shareholders’ expectations. With clear evidence that conflicts of interest are almost unavoidable in any agency relationships, an attempt will be made will be made to get an insight into that issue with regards to board of directors duties.
References: Bonazi L., Islam (2007), Agency problem assignment: describe the nature of the agency problem and the related corporate governance issues. Explain some of the actions that shareholders can take in order to deal with the problem with specific reference to the Companies Act. Describe the various ways in which the shareholders’ interests have also been protected, [online] Available at: http://www.scribd.com/doc/8400325/Agency-Problem-Assignment [Accessed 30 Sep 2008]. Brennan (1994), Agency problem assignment: describe the nature of the agency problem and the related corporate governance issues. Explain some of the actions that shareholders can take in order to deal with the problem with specific reference to the Companies Act. Describe the various ways in which the shareholders’ interests have also been protected, [online] Available at: http://www.scribd.com/doc/8400325/Agency-Problem-Assignment [Accessed 30 Sep 2008]. Jensen and Meckling (1976), Agency problem assignment: describe the nature of the agency problem and the related corporate governance issues. Explain some of the actions that shareholders can take in order to deal with the problem with specific reference to the Companies Act. Describe the various ways in which the shareholders’ interests have also been protected, [online] Available at: http://www.scribd.com/doc/8400325/Agency-Problem-Assignment [Accessed 30 Sep 2008]. Michael J. and William M. (1976), Robert T.K., Encyclopaedia of Business: Agency Theory, 2nd edition, A-Ar. Professor Bernard S.B. (4th April 2001), The Principal Fiduciary Duties of Board of Directors, pp-2.