agency problem - agencyproblem Definition...

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agency problem     Hide links within definitionsShow links within definitions  Definition Conflict  arising when people (the agents ) entrusted to look after the interests  of others (the principals ) use the  authority  or power  (given to them, directly or indirectly, by the principals) for their own  benefit  instead. It is a pervasive   problem  and exists in practically every organization whether a business , church, club, or government . Organizations   try to solve it by instituting measures  such as tough screening  processes, incentives  for good behavior  and  punishments  for bad behavior, watchdog bodies, and so on but no organization can remedy  it 100 percent  because  the costs  of doing so sooner or later outweigh the worth  of the results . Also called principal-agent problem  or  principal-agency problem . A conflict of interest arising between creditors, shareholders and management because of differing goals. For example, an agency problem exists when management and stockholders have conflicting ideas on how the company should be run. Governance Pays corporate collapses like Enron, Global Crossing and World Com have taught us anything, it's that investors can't afford to ignore the issue of corporate governance . When conducting fundamental analysis , investors need to keep a close eye on the way that companies keep management in check and ensure financial disclosure, board independence, and shareholder rights. Recent studies suggest that the benefits of scrutinizing governance extend beyond simply avoiding disasters. Good corporate governance can increase a company's valuation and boost its bottom line . What Is Corporate Governance? Corporate governance is a fancy term for the way in which directors and auditors handle their responsibilities towards shareholders and other company stakeholders. Think of it as the system by which corporations are directed and controlled. Typical corporate governance measures include appointing non- executive directors, placing constraints on management power and ownership concentration, as well as ensuring proper disclosure of financial information and executive compensation. Surprisingly, corporate governance has been considered a secondary factor impacting a company's performance. That is, as opposed to a company's financial position, strategy and operating capabilities, the effectiveness of governance practices was largely seen as important only in special circumstances like CEO changes and merger -and- acquisition (M&A) decisions. But recent events prove that governance practices are not merely a secondary factor. When the company's share price tanks because of an accounting scandal, the importance of good governance practices become obvious. Corporate disasters show that the absence of effective corporate controls puts the company and its investors at tremendous risk. What the Studies Prove
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This note was uploaded on 04/04/2012 for the course AASTT 24 taught by Professor Khlilaburass during the Spring '12 term at Arab Academy for Science, Technology & Maritime Transport.

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agency problem - agencyproblem Definition...

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