04_OverheadsForChen1 - Objectivesfortoday Brief review + a...

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ACCY 302 (Chen) Fall 2009, Class 04 1 Objectives for today Brief review + a few new concepts Firms’ Allocation of decision rights What steps are involved in making a decision? Why are different steps delegated to different agents? Features of decision control systems How does the selection of features vary depending upon ownership structure? A closer examination of decision control in closed structures
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ACCY 302 (Chen) Fall 2009, Class 04 2 Brief review. .. Agency relationships give rise to agency problems A firm is a nexus of contracts (implicit and explicit) to mitigate these problems Rules of the game give agents their decision authority and insure they act accordingly 1) Allocate decision rights 2) Design control systems that: a) specify performance measures b) tie performance measures to rewards and punishments
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ACCY 302 (Chen) Fall 2009, Class 04 3 Brief review + a few new concepts  (continued)  Decision right: right to decide on, take action with a resource Alienable right: right to sell a resource, capture the proceeds Decision rights & ownership rights are separated in firms but not in markets residual claim = owner's right to the net cash flows from use/sale of resource residual risk = net cash flows are uncertain
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ACCY 302 (Chen) Fall 2009, Class 04 4 Brief review + a few new concepts  (continued)  What is a goal that both principals & agents have in common? Reduce risk to a comfortable level But "comfortable level" is different in different people (remember REMM?) Where do we see risk reduction in practice? risk premium in incentive pay investors pay lower price for stocks of riskier companies
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ACCY 302 (Chen) Fall 2009, Class 04 5 What steps are involved in decision- making? 1) Initiation 2) Ratification 3) Implementation 4) Monitoring Decision Management (usually  agents) Decision Control  (usually principals or different  agents than those who do  decision management)
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ACCY 302 (Chen) Fall 2009, Class 04 6 Separation of decision management  from decision control Firms often separate decision management from decision control, and may even separate all four decision-making steps. Why? To MINIMIZE and DIVERSIFY RISK (of agency problems, of residual claim) Management and control are not separated when it is too costly to separate them Pilots in combat situations / paramedics in life threatening situations
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ACCY 302 (Chen) Fall 2009, Class 04 7 Decision control systems Common features: Board of Directors (BOD) often include outsiders, people with specific expertise Decision hierarchies often called "red tape" Monitoring systems supervisors, peers
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ACCY 302 (Chen) Fall 2009, Class 04 8 Example: Composition of US BOD Corporate Executive, 34% Investor/Financial, 18% Medical, 1% Other, 4% Professional directors, 8% Retired, 19% Academic, 5% Attorney, 3% Consultant, 8% Source: Board Practices/Board Pay by Investor Responsibility Research Center, 2004
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This note was uploaded on 11/08/2011 for the course ACCY 302 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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04_OverheadsForChen1 - Objectivesfortoday Brief review + a...

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