Divorce Between Ownership And Control & The Principle Agent Problem Flashcards
What are the interests of shareholders / owners
Return on investment, profits and dividends
Success and growth of the business
What are the interests of managers & employees
Rewards
Financial incentives
Promotions
Job security
What are the interests of customers
Value for money
Product quality & customer service
What are the interests of suppliers in the market
Profitable trade with the business
Financial stability
What are the interests of banks & other finance
Repayments
Profitability
Cash flows
What are the interests of the government
Correct collection and payment of taxes
Help grow businesses
Compliance with business legislation
What are the interests of the local community
Success of the business - creating jobs etc.
Compliance with local laws and regulations
What is the agency problem
Possible conflicts of interest that may result between shareholders (principle) and the management (agent) of a firm
What is the principle agent problem
An symmetric information problem - the wonders of s firm cannot observe directly say to say management so
Strategies to overcome the principle agent problem
- employee share ownership schemes
- long term employment contracts for senior management
- long term stock commitment
What is an activist shareholder
A shareholder who looks to put pressure on existing management or force through changes to management boards
What do some activist shareholders insist on doing
Businesses using profits to buy back shares to increase returns to existing shareholders
What is short-termism
Where a commercial business prioritises short-term rather than long-term performance
What performance measures do short-termism measure
Share price
Revenue growth
Profit
Productivity
Possible indicators of short-termism
Low R&D
High dividend payments rather than reinvesting profits
