Agency Conflict

The agency problems or conflicts are continuously happening between the principal and the agent. It particularly arises when an interest conflict occurs between the principal and the agent. In terms of finance, there are two core agency relationships; managers and stockholders and managers and creditors. To balance the interests and satisfactions between managers and stockholders which helps firm to improve performance, there are a variety of different measures have been generated and implemented by Telstra in order to optimize the bond and monitoring costs.

Firstly, the president and other management team members may get a higher overall salary by putting next year’s revenue to this year and transferring current year expenses to next year. The division’s management team’s salary and bonus may be based on the earnings of the division. By increasing revenue and decreasing expenses, they will be able to fake a higher operating income and thus receive higher compensation.

A company has to find a way to achieve a balance between rewarding managers to the point that it is detrimental to the company and finding a way to maximize the wealth of the shareholders.

An agent is one who acts on behalf of another called the principal. The agent has power to affect the principal’s legal position vis-à-vis a third party e.g. by entering into a contract or disposing of the property of the principal.

Directors have awarded compensation packages that go well beyond what is required to attract and hold on to executives and have rewarded even poorly performing executives. These executive pay excesses come at the expense of shareholders as well as the company and its employees. Furthermore, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company. Excessive CEO pay is essentially a corporate governance problem. When CEOs have too much power in the boardroom, they are able to extract what economists' call "economic rents" from shareholders (Economic rent is distinct from economic profit, which is the difference between a firm's revenues and the opportunity cost of its inputs). The board of directors is supposed to protect shareholder interests and minimize these costs. At approximately two-thirds of US companies, the CEO sits as the board's chair. When one single person serves as both chair and CEO, it is impossible to objectively monitor and evaluate his or her own performance.

The prologue takes place in the August of 1853. The first place described by the author is the central criminal court at the Old Bailey in London, England. Then, the prologue moves on to an academy called Miss Scrimshaw’s Academy for Girls. In specific, where the main character is described sitting, was a large room; simply furnished and lit up by candles.

sation is only one of a number of corporate governance issues that companies now face, we need to consider how to foster greater accountability by removing impediments to the market for the transfer of corporate control. We 've made it harder for shareholders to join together and shift control of a company by supporting tender offers from outsiders-outsiders who may be able to deliver stronger performance. That, I think, has made the market less efficient than it was 20 years ago. This issue needs more study, but I believe part ofthe overall answer on executive compensation is to restore a greater liquidity in the market for corporate control. Peter Clapman: I hope the new stock-exchange requirements help change things, but I 'm not counting on it. We 're talking about a closed-door process that happens at board meetings, and I don 't think we can count on real progress until we 're able to influence the private discussions that take place behind closed doors. TIAACREF has retained, as consultants, two retired CEOs who also sit on compensation committees of major American companies, and they 've talked about the way compensation is actually discussed in the boardroom, based on their informal discussions with compensation consultants. Here 's what they told us about the process. Let 's say a board is discussing whether to award the CEO

Before the compensation committee can decide how much to pay its Chief Executive Officer (CEO), the committee must first understand why effective managerial pay strategies are important to the corporation. Executive pay must function not only to attract the most talented and dedicated managers, but also to align CEO intentions with shareholder wishes. These so-called agency problems are at the heart of the debate of executive payment schemes. Michael Jensen explains in a 2002 article, “a rational manager with no investment in his firm would have little incentive to maximize its value, and every incentive to use it for his own ends” (Jensen para. 3). This is exactly the conflict which the compensation committee must avoid. The most basic (and practiced) method of avoiding this problem is to issue a portion of an executive’s compensation as stock and/or require the executive to hold a certain amount of stock ownership in the company. “A CEO who does not own a portion of the residual claims of the firm faces little direct incentive to maximize

* Since management compensation is tied to firm performance, managers are incentivized to keep costs under control and maintain profitability. However, it is important to balance cost-controls with

= Agency problem is the possibility of conflict of interest between the owners and management of a firm. They arise because the agent 's and the principal 's interests are not aligned. Maybe a real estate agent doesn 't get paid a commission but rather gets paid a flat fee. Then the agent just wants to make a sale rather than get the highest price for the seller.

Over time, good decisions will result in higher stock prices and bad ones, lower stock prices. Second, earnings manipulations through accounting changes will not result in price changes. Stock splits and other changes in accounting methods that do not affect cash flows are not reflected in prices. Market prices reflect expected cash flows available to shareholders. Thus, our preoccupation with cash flows to measure the timing of the benefits is justified.

An agency relationship is a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to the relationship are utility maximizers and they may have divergent goals and objectives, and there is good reason to believe that the agent will not always act in the best interests of the principal (Jensen, Michael C., and William H. Meckling. "Theory of the Firm, Managerial Behavior, Agency Costs, and Ownership Structure." Journal of Financial Economics 3 (October 1976), 305-360)

Economic science teaches us that due to their subjective needs, individuals have subjective preferences, and hence different interest. Occasionally different subjective interests give rise to conflicts of interest between contracting partners. These conflicts of interest may result in turn, in one or both parties undertaking actions that may be against the interest of the other contracting partner. The primary reason for the divergence of objectives between managers and shareholders has been attributed to separation of ownership (shareholders) and control (management) in corporations. As a consequence, agency problems

While disadvantages do exist in giving shareholder’s the power in controlling the compensation packages of directors, it essentialy does not result in ineffectiveness or demonstrate any fom of severe weakness in the UK’s corporate governance. In fact, it is the opposite. The advantages that arise from this scheme have shown that it has worked for the better and thus, proving its effectiveness. Moreover, it has also proved to a stronger pillar of strength to all the perceived weaknesses if this scheme was unavailable and shareholders did not have control of the compensation

In executive compensation researches, agency theory is employed as a standard approach to executive compensation research