Question

Explain how agency conflicts arise in an organization. What are the appropriate solutions to reduce agency costs? Cite appropriate examples from Saudi Firms. use your own words and do not copy from other resources.

 

Answer 1

In these modern corporations, which are very complex type nowadays, the overall capital is divided among the large number of shareholders which may be the employed in the company also legal entities may be owners of the company,from these large corperations the intrest of the shareholders,managers and directors are interwoven together.there is a strong chance of dividing of ownership and control among the managers and shakeholders .

the manager is a person who have the complete control over the affairs of company,they put their personal interest first and higher rather than the interest of the company ,these will lead to conflict among the shareholders(owners) and the managers of the company this problem is known as the agency problem, this is how agency problem araises in the organization

the common ways of reducing the agency cost is to impliment the incentice scheme

there are two types of incentives financial and nonfinancial

if a organization achieve certain goals then the management would receive a monetary bonus. financial incentives based on performance helps to encourage agents to act their best interest of the company

examples of financial incentives are

stock option : person buys shares ar predetermined price

profit sharing: predetermined percentage of company profits are given

non financial incentives are less commonly used not as a successfull at reducing agency cost compared to financial incentives

examples of nonfinancial incentives listed below

• training opportunity
• car for transport
• new workspace
• absolute recognition from coworkers

the famous firm ETIHAD ETISALAT known as mobility ,"khalid al kaf" the chief executive and put sekan okandan,his deputy in temporary charge while the companys audit committee probes accounting errors that wiped out about $380 m in previous profits

the company also revealed that it had misaccounted revenue related to the sale of top cards with handsets via third party vendors,restating revvenues down since the beginning of 2013

this situation of scandal is absolute of agency theory