why CEOs and managers often do not do what shareholders would want them to do (principal agent problem) ? please share an article to source
The Principal Agent Problem occurs when one person (the agent) is allowed to make decisions on behalf of another person (the principal). In this situation, there are issues of moral hazard and conflicts of interest.
The agent usually has more information than the principal. This difference in knowledge is known as asymmetric information. The consequence is that the principal does not know how the agent will act. Also, the principal cannot always ensure that the agent acts in the principal’s best interests. This departure from the principal’s interest in the agent’s interest is called an “agency cost.”
In many real-world examples, the agent will not prioritize the best interest of the principal, but will instead pursue his own goals. Politicians (the agents) and voters (the principals) is an example of the Principal Agent Problem.
A widespread real-life example of the principal agent problem is the way companies are owned and operated. The owners (principal) of a firm will elect a board of directors. The board of directors monitor and guide the management team like C-Level executives (the agents). More often than often, these agents will act in their own best interest. For example, greenlighting a massive project that gives them more authority or prestige instead of pursuing something else that could maximize shareholder value.
“Too Big To Fail” is another example of the principal-agent problem. The idea behind too big to fail is that some companies become so significant and critical to the economy, that no matter what they do, the government will bail them out. This situation creates a moral hazard, where the agents have no incentive to do the right thing since they know they won’t be holding the blame at the end. This happened infamously during the Great Recession, where the American government bailed out companies and banks like AIG and JPMorgan Chase, two of which alone received nearly $100 billion in assistance from the federal government.
why CEOs and managers often do not do what shareholders would want them to do (principal...
E. coli often comes to mind when reading about proteins and discussing them and it often makes headlines in the news. My challenge for this chapter's discussion topic is this: find a recent (within the last month) news article that involves E. coli and share it with the class. Why does it seem that this bacteria is always in the news? Remember, this chapter is the protein chapter, so why is E. coli so important to proteins and vice versa?...
how respond to following comment: okay so the separation of ownership and management creates a conflict of interests between shareholders and managers, shareholders cannot be certain that managers will act in their interests as residual claimants. why is it big problem? managers are employees. just monitor them.
Number 11# 11. Why might one expect managers to act in shareholders' interests? Give some reasons. 12. Many firms have devised defenses that make it more difficult or costly for other firms to take them over. How might such defenses affect the firm's agency problems? Are managers of firms with formidable takeover defenses more or less likely to act in the shareholders interests rather than their own? What would you expect to happen to the share price when management proposes...
Why do so many companies fail to have a strategy? Why do managers avoid making strategic choices? Or, having made them in the past, why do managers so often let strategies decay and blur? Does the company you work for have a strategy? What is it? It is decaying?
A guest speaker in class states “managers should only focus their attention on what shareholders want because they are the owners of the firm and the managers work for the shareholders”. Offer your view on this statement based on your readings, life experiences, and ethics.
as reported by Saylor Academy (2012), analysts, shareholders, suppliers and other stakeholders often want to evaluate profit trends within a company and compare a company’s profits with competitors’ profits. Which of the five common ratios would you use to evaluate a company’s profitability? Pick one. Please explain and cite your response. Gross margin ratio Profit margin ratio Return on assets Return on common shareholder’s equity Earnings per share
What are abnormal returns and why would an investor want to earn them?
Why do a company’s operators/workers, managers, and executives have different informational needs than shareholders and external suppliers of capital?
Explain several dimensions of the shareholder-principal conflict with manager-agents known as the principle-agent problem. To mitigate agency problems between senior executives and shareholders, should the compensation committee of the board devote more to executive salary and bonus (cash compensation) or more to long-term incentives? Why? What role does each type of pay play in motivating managers?
2. Why do line managers often fail to realize the value of human assets vis-à-vis other assets?