Discuss the agency problem within the firm. Be sure to identify at least three examples of how managers act in their own best interest and not in the stockholders’ best interest. Also, provide at least two solutions to the problem.
An agency relationship occurs when a principal hires another person known as an agent to act on their behalf. However, circumstances arise when the agents do not act for the best interest of the principal leading to an agency problem. A popularly known agency problem is the Enron Company scandal that arose from the top executives selling the stocks at a higher amount than the actual value due to the manipulation of accounting reports (Dibra, 2016). Enron’s agency problem led to the loss of huge stockholders funds.
The company managers are the main facilitators of the agency problem for acting in their interests rather than that of the stakeholders. For instance, the managers may collide with the auditors in order to compromise their independence (Pepper, 2018). Also, the management of companies may operate in highly risky areas that can easily lead to losses. The management may also evade taxes, engage in illegal business activities or fail to take part in corporate social responsibility. Moreover, the management may use part of the company’s resources including profits for personal interests (Pepper, 2018). For instance, the manager of a company may use the company’s vehicle to take the family on a trip.
The agency problems are solved by seeking legal action because of the misleading financial results that lead to losses. Also, there should be an allocation of monitoring costs to ensure that all the company resources are accounted for (Pepper, 2018). Moreover, the top management should be given dismissal threats in case they fail to perform according to the shareholder's expectations
Debra, R. (2016). Corporate Governance failure: the case of Enron and Parmalat. European Scientific Journal, ESJ, 12(16), 283.
Pepper, A. (2018). Agency theory and executive pay: The remuneration committee's dilemma. Cham, Switzerland: Palgrave Macmillan
by EssayRoyal, Dec. 8, 2019, 8:07 p.m.