Agency Problem And Possible Solutions | MBA in Business Analytics in Bangalore

Posted by Prof. Susmitha TP On 23/01/2023 08:13:28

Every corporation has a separation between ownership and control, which means that the company is owned by one person and is under the direction of a different person. This is due to the fact that most of the time, business owners lack the time and expertise necessary to manage and oversee the day-to-day operations of their business; as a result, they assign the job and administration of a business to a qualified individual. Work delegation can occasionally lead to a conflict of interest between the company's owners and managers, or the controller and shareholders. top b schools in bangalore for mba

 

This type of conflict of interest is referred to as an "Agency Problem." It denotes a scenario in which the agent prioritises advancing his own objectives and interests over serving the owners' objectives and interests. mba in hr colleges in bangalore

It is well recognised that knowledge asymmetries and possible wealth transfers from holders of debt instruments to stockholders through managers' approval of high-risk and high-return initiatives cause agency problems.  A well-known source of moral hazard is agency problems.mba courses in bangalore

When a person or organisation is protected from risk, it may act differently than it would if it were fully exposed to the risk. This is known as a moral hazard. Because managers and owners have various goals, moral hazard occurs in this situation.For instance, the business is thinking about making a risky new investment that could raise shareholder value. Shareholders will benefit from the investment, but not management, who will have the fear of losing their jobs if the activity does not go as planned. best mba courses in bangalore

Managers may opt not to make this type of investment even though it would hurt the company's shareholders specifically because there are various interests. mba in logistics and supply chain management in bangalore

When managers make decisions that serve only their own interests, they run the risk of losing their jobs in the organisation. For instance, even though it would be in the stockholders' best interests, management may oppose the decision to merge their firm with another. The possibility and high likelihood that the top managerial positions will change following any merger may explain the top managers' current actions. Stockholders may employ a variety of procedures to stop management from such action. Internal and external measures are the two categories into which the measures are separated. mba finance in bangalore

Internal measures

Internal audits are crucial to do in order to ensure the company's development and continuity. It aids in assessing the effectiveness of the business, spotting and stopping actions that may eventually be ineffective, as well as safeguarding cash and assets. The method of financially compensating the management is one of the actions that may be implemented to solve this issue. The best method is to determine their bonuses as a proportion of the company's realised profit. mba in business analytics in bangalore

Offering the managers the chance to purchase shares and become owners themselves is another well-established technique. This is how to bring the long-term growth, continuity, and rising share value interests of the managers and the shareholders into alignment. For effective company control, for improving their performances, for a better approach and for the availability of external financing, a sound corporate governance structure is crucial. Corporate governance refers to the relationships and responsibilities of all parties involved who have an interest in the organisation.

External measures

Engaging external auditors who would periodically assess the reality and objectivity of the company's financial reporting is the most practical course of action in this case. To ensure that the results are stated properly and that the management has not altered the outcomes for personal gain, precise financial reporting is essential. In order to use the audit reports as part of the company's valuation, they are sent to the shareholders, management, employees, and market participants.top mba colleges in bangalore

The market price of a company's shares, which is used to determine its value, is a sign of its successful operations. The shareholders may decide to sell their shares if the company is run by a manager whose decisions reduce the company's efficiency. The fact that the price drops as the size of the share offer increases should be enough to alert the board of directors that changes need to be made in the managerial division. However, it is crucial to note that in situations like the one described above, an analysis should be done first to determine whether the lower price is the result of poor management or the changing of certain external circumstances.

There are several options, but none of them is ideal. Therefore, it is essential to regularly monitor the managers' work in order to resolve or even prevent this issue, as well as to ensure that the business operates in line with local and international financial regulations.

Agency problems exist when there is a conflict of interest between the interests of the company's owners, creditors, or other stakeholders and management. In order to prevent an influence on their usual profitable business operations, organisations must address the underlying issues. Any organisation, group or organisation run by the government could have this issue.

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