Agency problem under corporate governance
- 2. LEARNING OBJECTIVES ► Define Agency Relationship? ► Define Agency Cost? ► Define Proxy Fight?
- 3. LEARNING OUTCOMES ► After completion of the topic students will be able to answer ► Agency Relationship ► Agency Cost ► Proxy Fight
- 4. AGENCY It Is An Organization Which Is Rendering Or Providing A Particular Services Or Producing A Product. In Financial Accounting When We Read The Principals, Concepts & Convention. There Is A Concept Name Business Entity. What Business Entity Tells? It Tells In That Business &The Owner Is Separate. Then Who Run Business? Management Runs Business.(Group Of Person) Owner Of The Company Are Shareholders (Who Manages The Business).
- 5. Concept ► Managers as agents of shareholders are supposed to take actions that maximize the welfare of the shareholders. ► In practice , managers enjoy substantial autonomy and have a natural inclination of pursue their own goals .This is the agency problem. ► Agency cost can be mitigated by monitoring the actions and behavior of the managers and by offering them right incentives that motivates them to maximize value. 1. Monitoring 2. Incentive compensation
- 6. ► The Relationship Between The Shareholder And Management Is Called Agency Relationship. ► If There Is Problem/Conflict Of Interest Between Shareholder And Management Is Called Agency Problem. ► What Is Interest? ► Business Goal Is To Max. Shareholder Value.Owner Is The Residual Claim. ► The Objective /Direction Of Owner Does Not Match/Align With The Objective/Direction Of Manager Then Problem Arises That We Called Agency Problem.
- 7. CONSEQUENCES OF AGENCY PROBLEM ► Business Suffers From Loss. ► Consequences Of Agency Problems Is Known As Agency Cost. ► The Cost Incurred Due To Agency Problem. ► It Is Of Two Types:- 1. Direct Agency Cost 2. Indirect Agency Cost
- 8. DIRECT AGENCY COST ► When Management Purchase Luxury Car Or Jet From That He Is Getting Direct Benefit On The Cost Of Owner. ► Owner Receives A Dividend From The Remaining Profit Out Of All Expenses.That Is Called Appropriation Of Profit. ► Management Conducts Any Activity Which Benefits The Management But On The Cost Of Owner That Is Called Direct Agency Cost.
- 9. INDIRECT AGENCY COST ► When Management Lost Or Deny Any Opportunity. ► Suppose There Is An Opportunity For Investment Which Is Also Risky And If The Manager Avail That Opportunity And Success Is Highly Available To The Owner. ► If The Opportunity Works Then Profit Will Be Given To The Shareholders. ► On The Contrary If It Fails Then It Will Become Problem For The Management.They Can Lost Their Job.Thats Why They Deny To Give New Investment Opportunity. ► It Bears The Loss Of Indirect Agency Cost.
- 10. HOW TO SOLVE AGENCY PROBLEM 1. Positive (Motivational Way)-how To Solve Agency Problem:- Through Compensation Remuneration (Salary) Reward For His Better Performance % Increase In Share (Bonus Share) This Helps In Alignment Of Both Shareholders And Management Goals.
- 11. ► 2. Negative (Controlling Way) ► Hire And Fire Of Managers creates Agency Problem. ► Today In Large Organizations Mostly Investors Are Invest In Large Amount.Large Institutional Investors Invest In Mutual Funds Agency Or Like U Can Say The Large Investors Invest In More Proportion Of Share In Company’s Share Capital. ► Suppose Share Capital Is 100% Then Large Investors Invest 60 %-70%.They Can Act On The Behalf Of Owners. ► Threat Of Firing:-shareholders Appoints Board Of Directors And B.O.D Appoints Managers. ► If Shareholders Are Unhappy With The Managers Then They Can Tell To The B.O.D To Replace The Mgmt.
- 12. This Way They Threaten The Mgmt They Can Loss The Job. It Is Called Proxy Fight. Threat Of Takeover.
- 13. ► ANY QUERY
- 14. ►THANK-YOU