Question

Explain how agency conflicts arise in an organization. What are the appropriate solutions to reduce agency costs? Cite appropriate examples from Saudi Firms.

Answer 1

Agency conflicts arise in an organisation when employees working in an organisation act in self interests and not in the best interest of the organization. This is likely to happen in all organisations since humans are basically selfish in nature and thus would like to maximize their own interests.

Ways to reduce agency costs are

1) Active involvement in running the organisation by owners or shareholders and not depending on management alone.

2) Have adequate corporate governance controls and structures to prevent any adverse management actions.

3) Ensure that board of directors include independent directors who would not be biased towards management.

An appropriate example from Saudi firms is where the majority share holders which is the Saudi government takes active involvement in running the company. Like Saudi Aramco is the largest Saudi organisation and the government takes active role in running the organisation and thus reduces agency effects. The operations and finance are controlled by the government and thus reduces conflicts of interests.