Agency theory is a widely known term in the field of businesses. This theory has to do with a problem that occurs in certain fields of a company and as a result, it affects the function and the performance of the firm. In this paper, we will discuss about the agency theory and the methods which will help us to deal with this problem.
Agency theory concerns the conflicts between people in the same company. Agency relationship is defined as a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent (Jensen and Mackling, 1976). This theory explains the relationship between principals, such as between
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The principal is not sure of the agent’s work because he has not the expertise so it is very possible to make a wrong decision on appointing a person as an agent.
The solution to the agency problem in order to minimize it is corporate governance. There is not only one accepted definition for corporate governance because there are many different views on this matter.
According to Cornelis de Groot (2009), corporate governance is the regulation of the corporate form that- by rethinking corporate law with purpose of guaranteeing the enhancement of shareholder value in the long term- addresses the roles of the corporation’s centralized administration (the unitary or dual board and the managers) and of the corporation’s shareholders, by specifically taking into account elements like integrity, transparency, proper supervision and accountability.
In other words, corporate governance is a set of regulations with which a company is administrated and controlled. The need for corporate governance stems from the loose commitments which determine the relationships between the principal and the
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In order to achieve this goal we use three mechanisms.
The first mechanism is the board of directors and the number of them is related with the effectiveness of the board. On one hand, Yermack (1996) is evaluating a proposal for limiting the size of the board of directors in order to improve their effectiveness. On the other hand, Dalton et al (1999) mention that a larger board provides better environmental links and more expertise. This means that a larger board will have members from many departments of the company or people outside the company. In this way, different opinions will be heard which may help the company to function
The agency problems or conflicts are continuously happening between the principal and the agent. It particularly arises when an interest conflict occurs between the principal and the agent. In terms of finance, there are two core agency relationships; managers and stockholders and managers and creditors. To balance the interests and satisfactions between managers and stockholders which helps firm to improve performance, there are a variety of different measures have been generated and implemented by Telstra in order to optimize the bond and monitoring costs.
Agency law is a relationship between a principal and in agent in which the agent is legally authorized to act on the behalf of the principal.
Corporate governance: “The set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control.” (Cornett, Adair, & Nofsinger, 2016, p. 16).
There are three internal and one external governance mechanisms used for owners to govern managers to ensure they comply with their responsibility to satisfy stakeholders and shareholder’s needs. First, ownership concentration is stated as the number of large-block shareholders and the total percentage of the shares they own (Hitt, Ireland, Hoskisson, 2017, p. 317). Second, the board of directors which are elected by the shareholders. Their primary duty is to act in the owner’s best interest and to monitor and control the businesses top-level managers (Hitt, Ireland, Hoskisson, 2017, p. 319). Third, is the
Corporate governance in itself has no single definition but common principles which it should follow. For example in 1994 the most agreed term for corporate governance was “the process of supervision and control intended to ensure that the company’s management acts in accordance with the interest of shareholders” (Parkinson, 1994)1. Corporate governance code is not a direct set of rules but a self-regulated framework which businesses choose to follow. This code has continued to change in the past 20 years in accordance with what is happening in the business world. For example the Enron scandal caused reform in corporate governance with the Higgs Report which corrected the issues which were necessary. Although it does not quickly fix problems, it gives a better framework to
The agency dilemma is when an agent has incentive to maximize his/her own interests instead of those of the principal. In addition, the agent has incentive to maximize its own welfare, signaling that every agent has incentive to maximize its own welfare.
Agency Conflicts: An agency relationship arises whenever someone, called a principal, hires someone else called an agent, to perform some service, and the principal delegated decisions making authority to the agent.
Corporate governance refers to ‘the ways suppliers of finance to corporations assure themselves of getting return on their investment’ (Shleifer and Vishny, 1997: 736). Corporate governance discusses the set of systems, principles and processes by which a
Agency problem is a potential conflict between the agent and shareholders in the interest. It is shown that ownership is separated from management. This cause not only is the divergence of ownership and control, but also the information is asymmetrical. When ownership is separated
Agency costs are inevitable within an organization whenever shareholders are not completely in charge; the cost can usually be best spent on providing proper material incentives and moral incentives for agents to properly execute their duties, thereby aligning the interests of shareholders (owners) and agents.
Agency Theory is tied up with analyzing and resolving any current issues that exist between their management team and owners. In Agency theory, way of think may
Corporate governance can be defined as the process, customs, laws by which the affairs of a company are managed and controlled it also
As explained by Schelker (2013), the agency problem between the owners and the management of a firm is at the heart of the corporate governance literature. Hence, there is a need for a
Agency occurs when one party or company executive (agent) works with goodfaith and trust for the best interest of other party or shareholder (principal).
Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by the board of Directors and the concerned committees for the company’s stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and social goals. Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the