Agency Theory in the Light of Management Term Paper

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agency theory in the light of management conflict with shareholders and issues pertaining to compensation packages for executives. It has 10 sources.

Management role as agency and their relationship with shareholders often result in conflict of interest where executive compensation is concerned. While on the one hand management is keen on developing the company through its qualified CEOs, shareholders are more interested in their returns. As a result there exist problems of differential of interests where investment cash flows, financial management and reporting are concerned. These mechanisms are considered to be the lifeblood of an organization yet have often been subjected to agency issues.


According to Osborne and Rubinstein, [1994] the game theory incorporates the spirit of trust between two decision makers. In a situation of agency problem propagation, the two entities involved in decision making mechanism are the stockholders and the managers. The level of agreement of sharing the decision making capabilities by each entity is differential from situation to situation. This level of abstraction ensures coverage of a range of dimensions of decision-making, based on a mutual understanding.

While studying an agency problem such as management and stakeholder relationship / communication gap, there is an urgency to view the game theory in the light of the agency theory. For example if this void in communication/relationship is encouraged can favor managers into pursuit of risk and return of their own priorities, as per the spirit of the agency theory [Lecture Notes, 2003c]. The author suggests that management needs to be monitored in order to minimize the personalization of responsibilities, in favor of individual interest instead of the corporate or shareholder interests. The difference in communication and relationships is attributed to the difference of goals of the managers and stakeholders [Lecture Notes, 2003d].

As identification of a problem logically leads
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to the solution of it, the (agency) theory hosts a resolution for this dilemma that exists between management and stakeholders. A way to minimize the conflict is highlighted by [Lecture Notes, 2003b] emphasizing on the importance of minimizing conflicts using contractual incentives offered to the management. This may include offering the management the "stock option." Other authors [Lecture Notes, 2003d] suggest financial reporting as one solid means of monitoring (and encouraging) solution towards the agency problems.

Yet despite this fact one observe that agency problem arise out of management's effort to sustain without having to sacrifice their profits to the shareholders in the form of dividend. Understating profits and overstating expenses can lead financial surplus in favor of management. This becomes the cause of discrepancy of figures when consistent infringement is carried out by the role of management. It is considerable to understand the harmful implications of debarring shareholders from the financial reporting of a firm. The firm is the one that suffers the implications in this case related to financial reporting. The act of management may also be responsible for discouraging the shareowners from investment in the future.


According to [Hallows, 1998], the study of the financials of Colgate-Palmolive revealed that the CEO for the company had earned a stock option worth 2 million dollars adding to the salary and bonuses. Upon further investigation and comparison it was found that the financial revenue of the CEO for Colgate-Palmolive had actually declined in comparison to the other companies. This establishes the fact that most companies have set high compensations for CEO's yet do not in effect perform as marginally as the shareholders expect them to.

Karen Hallows, [1998] mentions an investigation conducted in 383 companies to evaluate the conduct of a CEO governing each of those organizations through a time span of four years. The investigation brought out surprising facts that the annual rate of return measured up to be around 19.2% for those companies,…

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Works Cited

1. Heinfeldt, Jeffery and Curcio, Richard. Employee Management Strategy, Stakeholder-Agency Theory and the Value of the Firm. Journal of Financial and Strategic Decisions, Vol. 10, No. 1, Spring 1997

2. Author not available, Corporate Boards Should Focus on Performance, Not Conformance, Leadership and Change, Wharton, 2002.

3. Lippert, Robert L. Agency Conflicts, Managerial Compensation, And Firm Variance, Journal Of Financial And Strategic Decisions, Volume 9 Number 3 Fall 1996

4. Author not available, Lecture Notes from Stern University, 2003a at

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