Question

The Week 6 Case Study Assignment asks that you consider the agency relationship between a corporate financial manager and the shareholders of the corporation. As a corporate financial manager, you have the opportunity to manage the company's cash on behalf of its owners (shareholders). Consider the case of Apple, Inc, and the company's cash stockpile. The company's financial managers bear the responsibility of managing the cash reserves on behalf of Apple's shareholders. Write a 1-2 page paper, using the following guidelines: In the first half of the paper, research and briefly describe the concept of agency. In the second half of your paper, imagine yourself in the role of Apple's financial management team. Describe what types of measures you would take to ensure that any decisions made with regards to the company's cash faithfully represent the wishes of the shareholders.

Answer 1

Agency theory in finance can be defined in terms of interaction and interest between the various interested parties in the firm. This examines the duties and conflicts that possibly can occur between various stakeholders who have a principal-agent relationship. In this kind of set-up, one party (called the principal) employs another party (called the agent) to perform a task on their behalf. For instance, shareholders appoint management as their agents, employees of the firm are agents for managers and so on .

Each party has varied interest and which is reflected in their expectations from the firm. This usually creates conflict of interest between them. Whereas shareholders would want to maximize returns by taking on riskier projects and increasing share value. The management would prefer to take more sustainable growth projects, so that the firms and their jobs stay safe. Not that the shareholders would want to risk the survival of the firm, but their risk perception and objectives could be different from that of the management, This is commonly seen scenario, which is explained by principles of agency theory.

If I were a part of Apple's financial management team, I would take the following measures to ensure that any decisions made with regards to the company's cash faithfully represent the wishes of the shareholders. Firstly, I would offer managers Employee Stock Options as a component of their performance based pay, so that to some extent their objectives also match the shareholders in driving firm value. This could, help management choose projects to maximize shareholder return. Secondly, I would ensure all projects and decision such as company’s report and accounts, and the proposed final dividend, are finalized only after shareholders’ approval. Finally, I would suggest regular management audits, to ensure complete transparency between management and the shareholders.

The ultimate aim of a firm is to maximize shareholder value, and agency problem comes with costs, which prevents the firm from achieving its full potential. therefore, it is crucial that agents and principals are in sync to avoid these costs and achieve their common goal.

References:

Francis, A. (2014, March 29). Agency Theory in Financial Management. Retrieved from https://www.mbaknol.com/financial-management/agency-theory-in-financial-management/