Question

What is the possible agency conflict between inside owner/managers and outside shareholders? Have you ever dealt with an agency conflict at your job or heard of an agency conflict from someone you know? Describe an agency conflict and the harm it can have on an agency.

Answer 1

Any investor or shareholder invest in the company to maximise their wealth in company. Their prime objective of investment is capital appreciation in their total amount of investment.Shareholders are the real owners of company but it is not possible for all shareholders to run the company.So, few person are appointed by the shareholders to look after day to day activities and fuctions of company.

Normally, Companies or Businesses are run by owners or managers who are representative of shareholders and appointed by them. The main goal of business is to maximise the wealth of shareholders i.e. wealth maximiasation and owners or managers should run the company to achieve the goal of wealth maximisation. But in real life, few percentage of shares are hold by owners and managers in company and they focus on profit maximisation i.e increment in net profit of company under any circumstances which is short term in nature and may destroy wealth of shareholders in future.

Owners/managers focuses on profit maximisation because their remuneration and perquisites are depends net profit of company. Higher the net profit,higher will be remuneration and perquisites.So, their arise a agency conflict because shareholders wants wealth maximisation and owners/managers wants profit maximisation.

Profit maximisation is very short term in nature and it can harm the future potential profits of company.It may destroy the resources of company which leads to liquidation in future.