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COPORATE FINANCIAL IN ENGLISH

GROUP :
-


The Agency problem


AGENCY RELATIONSHIP
Hare holders

stnemegana

Possibly of coflict of interest

AGENCY PROBLEM


…the principal owns the majority of the equity

The manager (or the agent) is the person who owns only a small part of the equity of a company…


In large corporation the managers are not the owners

managers maybe tempted to act in ways that are not in the best interests of
shareholders

For example: they might buy luxurious corporate cars

the director clearly ignores the common

or overindulge in expense-account diners

good of the business, which should be his
ultimate goal

the interests of the mandator (the company, the shareholder) and the interests of the mandated (director) are contradictory


Lost
It
They might shy away from attractive but risky projects because they are worried more about the safety of their jobs than the potential for
superior profits


The shareholders, must seek to ensure that the authorized person (the manager) acts in the interests of the mandator

uti
Sol

on


spend
rs must
e
ld
o
h

e
shar
ve this,
To achie

:

rizati
Autho

on

monitor the performance of managers…

…create incentives for managers to pursue maximizing the
of shareholders, not just for personal gain

Several following arrangements are believed to help shareholders and manager are working toward common goals


PLAN


compensation schemes encourage management to

maximize shareholder

wealth

...But some schemes are not well designed and in these cases poorly

performing managers may receive large windfall gains

In the latter, the compensation plans cannot help to eliminate the agency problems


Inc

rea
s

ep

rofi

t fo

r th
ea
gen
t

s


Rewarding managers means improving the benefits for
shareholders

Shareholders

can reward

in the futu
a certain date

allows
stock options,
h
it
w
s
er
g
a
man
rice
re at a fxed p

them to buy

stock at


from the

ngly
s stro
e
s
i
r

tock

I f th

s
e of a
e pric

day the

the stock
buy

manage

and the

r is give

n the rig

date of e

xercising
th

the real manager will earn a fortune by buying the stock at a predetermined
price and selling it to the market

ht to buy

e right to


These managers have a clear benefit from pushing up stock prices and thus to a certain extent have reached
consensus with shareholders, as the company works well,…

… they both will helpful.


rs
o
t
c
e
r
i
D
f
o
The boards


Board of directors are often portrayed as passive supporters of top
management

But when the performance starts to slide
and managers don’t offer a credible
recovery plan, boards do act

To solve the problem of the boss and the agent, the owner or major shareholder of the company may be dismissing
bad management, but it is extremely difficult

The shareholder must have time, energy and money to determine if the
board of directors really works

In addition, the legal mechanism that makes dismissing a bad manager is
complex and time-consuming


On the other hand, they can try to replace the board in the next election

The dissident shareholders will attempt to convince other shareholders to vote their slate of candidates to the board

If they succeed, a new board will be elected and it can replace the current
management team

So taking full control of the company by acquiring equity contracts to set up a
new management team is a good solution for the principals and the agents



The problem is that if the management is not be able to run the company effectively, the stock price will

de

cre

as

e

The company may be at risk of being taken over by another company, and of course senior
management positions will lose their jobs

This threat remind managers to keep their eyes on the company’s performance


Specialists Monitoring
Specialists Monitoring


scruti
Managers are subject to the

ny of specialists

rs to
alysts who advise investo
an
y
rit
cu
se
the
by
d
ore
ns are monit

buy, hold, or sell the

Their actio

company’s shares.

Moreover, if the manager knows he is closely
monitored by other shareholders, he will pay more
attention to the company's profits

They are also revie

wed by banks or le

By this way, ti

ghtly monitor
ing

nders, which keep

information fr
om

an eagle eye on th

the owner can

e progress of firm

minimize the
di
manager

s receiving their lo

sagreement by

ans

imbalance info

rmation betw
een the owne

r and


Legal and Regulatory Requirements


CEOs and financial managers have a legal duty to act responsibly and
in the interests of investors

However, the manager can use fraudulent measures
and detecting fraud is not easy. Most notably, the
scandal led to the bankruptcy of the US energy giant
Enron - the largest bankruptcy reorganization in
American history in 20th century
(SEC) sets accounting and reporting standards for public companies in order to ensure

consistency and transparency

The SEC also prohibits insider trading, that is, the purchase or sale of shares based on
information that is not available to public investors


legal and regulatory standards

compensation plans that tie the

rewarding managers for their

fortunes of the managers to the

dedication

fortunes of the firm

Agency problems are mitigated in
monitoring by lenders, stock
market analysts, and
investors

practice in several ways
taken over by
another
company

ultimately the threat that
poorly performing

managers can be fired