Agency theory recognises the relationship between the principals (called the shareholders) and the agents (called the managers) of a corporation; a relationship whereby work is delegated by the principals to the agents (Mallin 10).This principal-agent mechanism, is said to have resulted in two recurring themes. First, that the central economic problem addressed by corporation law is reducing "agency costs" by keeping directors and managers faithful to shareholders ' interests; and second, that the primary goal of the public corporation is or ought to be maximizing shareholders ' wealth” (Blair and Stout 248-249). There are however, numerous potential issues that can arise from this so called agency relationship (Mallin 10). Firstly, according
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Secondly, there may be an abuse of power on the part of the agents for pecuniary or other advantage. Thirdly, agents may not pursue appropriate risks in the interest of the principal because their attitudes towards risks are different. Lastly, (although this does not exhaust the list), there is the issue of “information asymmetry whereby the principal and the agent have access to different levels of information; in practice this means that the principal is at a disadvantage as the agent will have more information” (Mallin 11). Therefore, as it relates to corporations and the problems with corporate control, agency theory recognizes corporate governance as a vital monitoring devise aimed at reducing the issues that may arise from the agency relationship; much of which is established in the separation of what Berle and Means (1932) call the “separation of ownership and control.” Here, the agents constitute the managers while the principals constitute the shareholders. In the context of corporate governance, it is the most common agency relationship (qtd. in Mallin …show more content…
Attempts to look at it from the perspectives of the arguments for shareholder primacy, has had several drawbacks; flipping these arguments upside down; with no firm hold. For instance, one of the most frequently talked about arguments many used to justify shareholder primacy stands on the grounds of shareholder ownership of the corporation. However, Stout also highlights that from a legal standpoint, “shareholders do not, in fact, own the corporation. [Instead], they own a type of corporate security commonly called ‘stock’ (Stout 1191). Moreover, in reverting to the objective of value maximization, Blair and Stout makes it even clearer that the benefits are unclear when she posits that, by “encouraging corporate directors to maximize shareholder value can [also] hurt shareholders themselves” (Blair and Stout 8). They further argue that the principal-agent model presupposes that the shares in these publicly held firms are held by identical entities with identical interests who are solely concerned with the firm’s share price; a complete fallacy. In reality, shareholders own shares either directly or indirectly through pension and or mutual funds; and, who have different interests which sometimes conflict. Therefore, business strategies devised to increase share price will benefit some shareholders while injuring others. (Blair and Stout 8-9). Another argument for
Secondly, there may be an abuse of power on the part of the agents for pecuniary or other advantage. Thirdly, agents may not pursue appropriate risks in the interest of the principal because their attitudes towards risks are different. Lastly, (although this does not exhaust the list), there is the issue of “information asymmetry whereby the principal and the agent have access to different levels of information; in practice this means that the principal is at a disadvantage as the agent will have more information” (Mallin 11). Therefore, as it relates to corporations and the problems with corporate control, agency theory recognizes corporate governance as a vital monitoring devise aimed at reducing the issues that may arise from the agency relationship; much of which is established in the separation of what Berle and Means (1932) call the “separation of ownership and control.” Here, the agents constitute the managers while the principals constitute the shareholders. In the context of corporate governance, it is the most common agency relationship (qtd. in Mallin …show more content…
Attempts to look at it from the perspectives of the arguments for shareholder primacy, has had several drawbacks; flipping these arguments upside down; with no firm hold. For instance, one of the most frequently talked about arguments many used to justify shareholder primacy stands on the grounds of shareholder ownership of the corporation. However, Stout also highlights that from a legal standpoint, “shareholders do not, in fact, own the corporation. [Instead], they own a type of corporate security commonly called ‘stock’ (Stout 1191). Moreover, in reverting to the objective of value maximization, Blair and Stout makes it even clearer that the benefits are unclear when she posits that, by “encouraging corporate directors to maximize shareholder value can [also] hurt shareholders themselves” (Blair and Stout 8). They further argue that the principal-agent model presupposes that the shares in these publicly held firms are held by identical entities with identical interests who are solely concerned with the firm’s share price; a complete fallacy. In reality, shareholders own shares either directly or indirectly through pension and or mutual funds; and, who have different interests which sometimes conflict. Therefore, business strategies devised to increase share price will benefit some shareholders while injuring others. (Blair and Stout 8-9). Another argument for