Principals-Agents’ Conflict of Interest

Principals (sh arholders) agent (managers) problem represents the encounter of provoke between direction and owners. For example, if sh atomic number 18holders can non effectively monitor the managers behaviour, then managers may be tempted to use the devoteds assets for their own ends, all at the expenses of shareholders. Discuss the pros and cons of this statement with go steady to duties of Board of Directors. Most presidential terms these days are no to a largeer extent possess by their managers. This separation of ownership and charge gives rise to what is called result relationship.Jensen and Meckling (1976) thinkt the agency relationship as a contr accomplishment under which oneness party (the principal) engages another party (agent) to perform the some services on their behalf. As part of this, the principal exit delegate some last making authority to the agent . However, it is important to mention that this relationship is not endlessly peaceful and harmonio us rather, it usually raises some agency problems usually called participation of interests between shareholders and managers of the compevery.These encounters occur when a person i. . the manager has an cartel not to act in his own personalized interest except in another persons interest i. e. the shareholders. This agency that in whatever situation, managers must(prenominal)(prenominal) prioritise shareholders benefits. But is this commitment always value in principals-agents relationships? Hopefully, between these two groups, is the shape up of directors directors who are elected by shareholders to act as their representatives by monitoring and controlling managers tasks and ensuring they are in line with shareholders expectations.With clear yard that troths of interest are almost needful in any agency relationships, an attempt volition be make pass on be made to get an insight into that issue with regards to get on of directors duties. Brennan (1994) states that agency problems emanate from the arrangement where the interests of the agents differ substantially from those of the principals because of the impossibility of absolutely contracting for every possible action of the agents whose decisions affect both his public assistance and the welfare of the principal .Therefore, this raises the issue of finding ways to motivate managers to only when act in the best interest of shareholders. However, in a creative activity where the labour market is becoming more and more imperfect and competitive, managers will be more concerned with their personal benefits at the expense of shareholders benefits. Since they are the one taking care of the day-to-day activities of the caller-out, they know better than anyone any single details about how the various tasks are being performed and how that affects the company.Therefore, they cleverness be tempted to take advantage of that by consuming some of the organisations resources in the form of lavish perquisites such as airplanes. dresser passage of armss imply that shareholders wealth maximisation is being subordinated in managers goals for the company. Clear evidence of this assumption could be that top level managers are more upset(a) about increasing their salaries, raising their status within the company, creating more opportunities for humble managers or assuring their job security and to master all this, their master(prenominal) objective could rather be to enlarge the firm by creating more subsidiaries.Such an action could produce results that do not necessarily maximise the value of the organisation for shareholders, rather, management welfare. We can notice that in conflict of interest, agents are mostly interested in achieving objectives that they feel will be profitable to them, barely which are not necessarily or instantaneously for the sake of shareholders.This occurs as a result of the distance created between the shareholders and the management team whic h prevent the former to effectively monitor and control managers behaviour. If agents do things that hurt principals, why dont they take strong actions against that? In order to remedy to this situation, shareholders rely among others on the board of directors which they elect to ol concomitantory property out for their interests and protect them for financial losses due to inadequate managerial actions.Bonazzi L. , Islam (2007) defines the function of the board as a collective responsibility to catch the companys purpose and ethics, to decide the direction, i. e. the strategy to plan to monitor and control managers and CEO activities, then to piece of music and make recommendations to shareholders . To achieve this, they are evaluate to act in accordance with their four important duties which involve the fiduciary duty, the duty of loyalty, the duty of confidentiality and the duty of care.In performing their fiduciary duties, directors assumes two roles, the first one as an a gent which means acting on behalf of shareholders and the second one as a regent which means they are in charge of controlling the organisation assets so they have to act bona fide which means in good faith towards the company acting only within the scope of their powers and uniquely for the purpose that benefits the line of reasoning and to avoid being involved in conflict between personal and the companys interest.First and foremost, the board has as duty to sway the organisation by designing broad policies, and objectives which are intended to allow for managers with guidance on how they are expected to run the business, i. e. prioritizing principals benefits, and, where they are expected to take the firm to in terms of increasing its value. They must constantly review the performance of the chief executive to ensure that managerial actions are in line with shareholders wishes and given that they are accountable to the former, they have to report to them about the overall o rganisational performance.Regarding their duty of loyalty, directors must prevent conflict of interest by avoiding transactions which may generate a potential conflict those transactions according to Professor Bernard S. Black of Standford Law School in an article entitled The principal Fiduciary Duties of Boards of Directors are called self-dealing transactions.Representing at the equal time the boss to one extend and the subordinate to another extend, directors must make sure never to act in ways that will harm all the shareholders or the executives, treat both parties with care and supporting an eye on and try to make good decisions i. . that will compromise none of the parties, but which will be profitable to the firm. Also, board members have the duty to follow private all dealings, matters and information from the board meeting and the company in order to avoid the disclosure or misuse of information which may lead to a conflict. From the study of board members duties, we can state that companies corporate governance rests mostly on their shoulders.So, when effective, it permits the realisation of corporate objectives, risk management, the step-down of agency problems and an increase in the value of the firm. Despite the fact that conflict of interest is quite an obvious issue between shareholders and managers, it is important to keep in mind that the former are the owners of the business and thus, have great powers on the company for instance through their voting rights at the one-year shareholders meeting where they talent decide to vote with their feet i. . selling their shares, exposing the organisation to a potential takeover that will lead managers to lose their job. Consequently, managers must at least try to adjoin their principals by aligning their actions and decisions with shareholders expectations as healthful as must principals induce their agents to work for their best interest. To achieve this, they must incur some agency be. In the 1976 Journal of Finance typography by Michael Jensen and William Meckling, it is stated that there are three major types of agency costs (1) expenditures to monitor managerial activities, such as audit costs (2) expenditure to structure the organisation in a way that will limit undesirable managerial behaviour, such as appointing outside members to the board of directors or restructuring the companys business units and management hierarchy and (3) prospect costs which are incurred when shareholder-imposed restrictions, such as requirements for shareholder votes on particular issues, limit the ability of managers to take actions that advance shareholder wealth.In a nutshell, conflict of interest is a real fact in every business. Principal-agent relationship can be viewed as complex in terms of how exactly agents are expected to act towards their principals. Obviously, their acts must always be aimed at serving shareholders interest, but this statement seems to imply that ei ther principals interests are always morally acceptable or managers might act unethically provided they fulfil shareholders expectations.Virtually, all corporate code of ethics addresses conflict of interest because it interferes with the ability of employees to act in the best interest of the firm. The fact is that, the agent is expected to act solely for the benefit of the principal in all matters and situations, yet, the kind of situation or dilemma the agent might be called upon to act in his principal interest are not easily predictable or identified. As optimal solution, it would be positive for both parties if they could work in concert prioritising the success of the organisation, and trying to satisfy as much as possible each groups benefits, because it would help avoiding or at least reducing potential conflict of interest.