CORPORATE GOVERNANCE PP 6 AGENCY THEORY.pptx - CORPORATE...

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CORPORATE GOVERNANCE AND BUSINESSETHICSGOVERNANCE ISSUES – AGENCY THEORYByDr Stephen NhutaGraduate School of Business Leadership (MSU)
WHAT IS AGENCY THEORYAgency theory is the branch of financial economics that looks at conflicts of interestbetween people with different interests in the same assets.This most importantly means the conflicts between: shareholders and managers ofcompaniesThe theory explains the relationship between principals, such as a shareholders, andagents, such as a company's managers.In this relationship the principal delegates (or hires) an agent to perform work.The theory attempts to deal with two specific problems:how to align the goals of the principal so that they are not in conflict (agency problem)that the principal and agent reconcile different tolerances for risk.
ORIGINS OF AGENCY THEORYDuring the 1960s & 1970s, economists explored risk sharing among individuals or groups.This literature described the risk sharing problem as one that arises when co-operating partieshave different attitudes toward risks.Agency Theory broadened this risk sharing literature to include the so called agency problemthat occurs when co-operating parties have different goals and division of labor.Specifically, this theory is directed at the ubiquitous agency relationship ,in which one partydelegates work to another agent who performs that work.Agency Theory attempts to describe this relation using the metaphor of a contract.Agency Theory suggests that the firm can be viewed as a nexus of contracts (loosely defined)between resource holders.
CONFLICTS BETWEEN MANAGERS AND SHAREHOLDERTo address the conflict of interest between shareholders and management, it is important tostress that even within the same class of shareholders, there may be conflicts, this conflict mayrelate to what proportion of the company’s profit should be paid in the form of dividend andwhat proportion should be retained for future investments and for capital investment purposes.

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Term
Fall
Professor
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Tags
Management, Information asymmetry, Principal agent problem

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