Essay on Problems with the Agency Relationship

PROBLEMS WITH THE AGENCY RELATIONSHIP

If you happen to be the sole owner of a organization, you make the decisions that affect your own health and wellness. But what if you are a financial director of a business and you are not really the sole owner? In this case, you are making decisions for owners other than yourself; you, the financial administrator, are an agent. An agent is known as a person who functions for—and exerts powers of—another person or perhaps group of individuals. The person the agent presents is referred to as the principal. The relationship involving the agent great or her principal is an agency marriage. In an agency relationship, the agent is definitely charged with all the responsibility of acting pertaining to the principal. Is it feasible the agent may not work in the best interest with the principal, but instead take action in his or perhaps her own self-interest? Yes—because the agent has his or her own target of maximizing personal riches. In a large corporation, for example , the managers may appreciate many perimeter benefits, including golf club memberships, access to non-public jets, and company vehicles. These rewards (also referred to as perquisites or perks) can be useful in performing business and might help appeal to or maintain management staff, but there is room intended for abuse. Imagine if the managers start spending more time on the golf course than at their desks? Suppose they use the business jets for private travel? Imagine if they buy company vehicles for their teenagers to drive? The abuse of perquisites imposes costs within the company—and in the end on the owners of the firm. There is also a probability that managers who truly feel secure inside their positions might not exactly bother to expend their best efforts toward the business. This is referred to as shirking, and it too imposes a cost for the company.

Finally, there is the possibility that managers will work in their very own self-interest, rather than in the interest of the shareholders when those passions clash. For example , management may well fight the acquisition of their particular company by some other organization, even if...

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