Milton Friedman's Freeman Relationship Between Principals And Agents In Business

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The agency theory (Jensen, 1976) is a presumption that explains the relationship between principals and agents in business. The agent represents the principal in a business transaction and is expected to represent the best interests of the principal without regard for self-interest. An agency relationship is fiduciary in nature, and the actions and words of an agent exchanged with a third party bind the principal. Agency theory is concerned with resolving problems that can exist in agency relationships due to unaligned goals or different aversion levels to risk. The most common agency relationship in finance occurs between shareholders (principal) and company executives (agents).

A voluntary, good faith relationship of trust, known as a fiduciary
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Company executives, being an agent of shareholders, all their actions and decisions should aim at maximizing the shareholders’ wealth, i.e. profits of the business, to discharge their fiduciary duties. In addition, employment contracts of company executives are normally structured to provide incentives for the agent to take actions that are also in the best interest of the principal, and they will frequently include a base salary plus a variable bonus based on achieving certain earnings targets. Milton Friedman’s shareholder model concerned that if management is to exercise moral and social responsibility, it may lead to abuse and inefficiency which we may understand as agency …show more content…
It is essential to achieve a wide consensus on how to control management actions in support of stakeholder interests. Cola-cola company is typical example for making much money by maintaining a powerful brand name and manufacturing an enjoyable beverage for consumers, a form of maximization of shareholder value based on its brand name and product. However, maximizing shareholder value also needs satisfaction of stakeholder’s interests because stakeholders are people who contribute indirectly in creating the value for the

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