Question

At the heart of Agency Theory are the twin issues of Goal Conflict and Risk Sharing.  

Discuss each of these

1. what each is;
2. why it creates problems; and
3. what can be done to counteract it (only one option is needed).

Answer 1

The Agency theory focuses mainly on the method of implementing the plan of action on resolving the issue when both Deleting authority executives and the agents involving to attain business goals. Both parties face such a clash of interest in the real-time situation in finalizing the important decision on the commercial operations of budget planning, calculation of the premium of all share-holders. Such a clash of interest paves the way for the issues of Goal Conflict and Risk Sharing. Let us discuss the nature, problems, and counteract solutions for the twin issues of Goal Conflict and Risk Sharing, respectively.

Goal Conflict refers to the difference of opinion that appears when the two parties, namely higher officials and the agents who want to direct the business or for any social-welfare planning without proper coordination. It may also lead to chaos among all the policy planners of the well-organized team. The second concept of risk-sharing may explain its own meaning with the example quote with a day-to-day situation. The shareholders may expect a good return from their prudent investment. But the Director of the Firms who promises to pay the premium to raise the sufficient capital for business expansion needs to face the effects of risk in returning the principal amount with more interest rate amidst the critical market situation. The market risks should be equally bare by the Directors and the shareholders. If both parties do not share such risk in no justifiable way, then the rate of risk-sharing will be high on behalf of both of them.

The above facts will create problems. Let us sum up briefly, how far it creates the problems. They classify the stakeholders as few important types as preference and equity shareholders. The Directors execute the method of paying the premium to the preference shareholders first and then to the equity shareholders when there is the problem of winding up the company during an economic crisis in the global problem of recession. Then there will be an immense problem of goal conflict and the risk-sharing approach towards all the shareholders' positions of holding their own shares.

Finally, to counteract the above twin problems of Goal conflict and the Risk-sharing approach, both principal and the agents should take rational decisions to benefit themselves without affecting the others' growth. The Director (principal) may appoint the monitoring committee to redress the issues of conflict among all the shareholders and the managers who head as the chairperson who fixes the margin for all the shareholders' premium. The shareholders can lodge their issues as complaints to the monitoring committee members. Through such members, Managers can take the right decision to bridge the gap of conflicts between both parties. So the rational decision-making is the only prominent choice for resolving the twin issues which connect with the concept of the Agency theory.