Ethics and Firms Goals

Ethics and Firms Goals - Concept Question 3: Shareholders...

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Concept Question 3: Shareholders own a corporation. An agency relationship is “the relationship between stockholders and management” (Jaffe, Jordan, Ross & Westerfield p13). The process whereby the owners of a corporation controls the firm’s management is that the shareholders (owners) elect the board of directors, who hire and fire senior management. Another process where owners control the firm’s management could be by takeover. The main reason that an agency relationship exists in the corporate form of an organization is to protect the wealth of the company and the shareholder’s investment. One kind of problem that can arise from an agency relationship is known as an agency cost. An agency cost is “…when stockholders may lose a valuable opportunity” Jaffe, et al p13). It is “…the cost of conflict of interest between stockholders and management. These costs can be direct or indirect” (Jaffe, et al p13). An example of indirect agency cost is when the stockholders want to invest in an opportunity that could be favorable to EPS yet management doesn’t accept the opportunity. Direct agency cost is “…a corporate expenditure that benefits management but costs the stockholders” (Jaffe et al p13). An example would be the purchase of a fleet of limousines for senior management or the board of directors. Another type of direct agency costs is “…an expense that arises from the need
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Ethics and Firms Goals - Concept Question 3: Shareholders...

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