Question

If a firm ties its managers' compensation plans to the profit maximization, we may see a higher agency conflict. Because managers do not want to implement the risk projects. Do you think it is easy to behave ethically from the firm’s perspective? Why or why not?

Please write the answer using the KEYBOARD

Answer 1

If the firm will be combining the managers compensation to profit maximization, there will be a lot of agency conflict because manager will be implementing higher risky projects in order to attain higher profits and that will not be in the interest of shareholder because they will be risking the money of the shareholder and they will be trying to take very high risk in order to maximize profits and that will be increasing the overall agency conflict in the organisation.

It is not easy to behave ethically from the perspective of the firm because the financial objective of the firm will conflicting with the ethical objective of value maximization in the long run,so manager will be trying to attain higher profits because they have their own objectives and they will be trying to achieve their objective within the time frame so manager will be feeling that being ethical is important but it is not consistent with their financial objective of maximization of the prophets and hence it can be said that managers are trying to operate in their own interest by maximizing the profit but managers are always the agents of the shareholders and they should be trying to behave in synchronisation with the firm's objective so that there will be maximization of the value of the company in the long run.