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Give an example of a possible agency conflict between inside owners/managers and outside shareholders. What could be done to mitigate this issue? +600 WORDS
Agency conflicts between inside owners/managers and outside shareholders can arise when the interests of the two groups diverge. One example of this is when an owner or manager has an incentive to pay themselves more than their contribution to the company warrants, resulting in less money left over for dividends and other payments which benefit outside shareholders. This type of conflict can lead to a misalignment of incentives and ultimately result in lower returns for outside investors while insiders reap all the benefits.
One way that agency conflicts between inside owners/managers and outside shareholders can be mitigated is through proper corporate governance structures. Good corporate governance structures should include independent members on boards who are able to act as watchdogs for investor interests by keeping an eye on executive compensation packages, making sure that transactions are conducted at arms-length, preventing insider trading and ultimately safeguarding shareholder value (Carraher et al.,2015). Additionally, it is important that these board members are not beholden to management due to any potential conflict of interest (Lecoutere & Valckx, 2019).
Other measures that could help mitigate agency conflicts include setting up effective internal controls such as internal audit procedures and implementing clear policies regarding disclosure rules (Shetrone et al., 2014), as well as establishing stringent performance measurements which link senior management’s payouts directly with organisational results (Muehlfeld & Schmidpeter, 2015). Furthermore, ensuring a high level of transparency within organisations will reduce agency problems by giving external stakeholders access to information about how decisions are being made so they can hold managers accountable if necessary (Manzoni & Storkenmaier, 2017). Finally, good communication between inside owners/managers and outside shareholders must also be established in order to foster trust among both parties (Al-Khazali et al., 2019).
In summary, there is no one solution for mitigating agency conflicts between inside owners/managers and outside shareholders; rather it requires a holistic approach incorporating multiple strategies. Good corporate governance structures combined with transparent decision making processes, effective performance measurements linked with reward systems as well as open lines of communication amongst all stakeholders will go along way towards addressing this issue.
References:
Al-Khazali M., Alkharabsheh S. & Abujamel T .(2019) Corporate Governance Practices: An Effective Tool To Reduce Agency Conflicts Between Management And Shareholders? International Journal Of Business And Management , 14(8), pp 51-58 Carraher S., Marchant G,. Zardkoohi A& Linder J.(2015) Exploring The Relationship Between Internal Control Effectiveness And Agency Conflict In Small Businesses Accounting Horizons 29(3): 477–497 Lecoutere E. & Valckx C.(2019) ‘The Impact Of Board Characteristics On Firm Performance: Does Board Independence Matter?’ Corporate Governance : The International Journal Of Business In Society 19(2):133-152 Manzoni JF&Storkenmaier W.(2017) Transparency Is Shielding From Managerial Discretionary Behavior Journal Of Economic Behavior & Organization 136: 535–561 Muehlfeld K& Schmidpeter R.(2015) Performance Measurement Systems As An Instrument For Aligning Employees With Organizational Goals Total Quality Management And Business Excellence 26(5):571–588 Shetrone R,. Boccadoro F,. Et Al .(2014 )Audit Committees As Institutional Mechanism To Mitigate Agency Conflicts Advances In Accounting 30(1): 83 – 96