Question

"Please can I get a feedback to this discussion post below in 2 hours. Thanks

There was only one current agency conflict that I found and that was the improperly handling of customers’ accounts by the San Francisco bank Wells Fargo. In this case, the employees of this bank opened accounts and transferred funds that were not wanted by the customers. In doing so the employees were rewarded with compensation due to selling products and opening accounts (Competitive Enterprise Institute). Possible solutions to resolving problems within the agency are to audit any work done by management, investors and analysts need to monitor anyone that is performing poorly, get rid of upper management that is not performing properly, and vote for a new board of directors if shareholders are not satisfied with results. If managers focus on the shareholders interest rather than their own then most of these problems can be solved.

Answer 1

The agency problems starts from the point when the activities of the management are working against the shareholders target ie. to appreciate their wealth. As long as the management activities are achieving the desired return on capital, there does not stand any Agency Problem.

In the case of San Francisco bank Wells Fargo, the employees’ action to transfer of the funds which is not utilized by the customers would raise the income of the bank and ultimately the shareholders’ wealth. Therefore, towards the rewards of their actions the higher compensations were offered to the employees. Here, the agency problem does not exist.

Whenever, the desired Required Rate of Return (RRR) is not achieved by the management and shareholders are not satisfied with the management working, the need for the audit comes from the “Agency Concept” point. The work performed by management and the designated employees are analyzed and the cause of reduction in the Return to capital is accessed. The solution could be a) change of management, b) replacement of any director or the whole board, c) If it is the industrial effect, then revision in the Rate of Return. The action towards the solution of the Agency Problem could only be taken after accessing the actual reason/cause of the reduction in RRR.

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