Week 7: Agency Problems, Forecasting,
and Corporate Governance
4343 unread replies.7272 replies.
Do some research and find some historical or current real-life examples of agency
problems. Will the measures discussed in the text help to prevent problems like your
examples in the future? What else would you advise? You may provide examples of
agency problems from your own experience. If you do that, be careful to provide enough
anonymity so that you won't get in trouble.
**For full credit reply to the prompt and to another student's response. You should have
two postings for your 20 points.
o Collapse SubdiscussionCamiesha Harmon-Askew
Camiesha Harmon-Askew
Feb 14, 2021Feb 14 at 4:57am
Manage Discussion Entry
The agency problem is a conflict of interest inherent in any relationship where one
party is expected to act in another's best interests. In corporate finance, the agency
problem usually refers to a conflict of interest between a company's management
and the company's stockholders. The manager, acting as the agent for the
shareholders, or principals, is supposed to make decisions that will maximize
shareholder wealth even though it is in the manager’s best interest to maximize his
own wealth.
In the case of Girvan Corp., there was a clear cut case of the clash between goals of
the management and shareholders. The intentions of the company's managers pose
questions from the very beginning, ie the formation of the Girvan machine. Girvan
Corporation Ltd became listed when it was acquired by a small publicly listed firm,
Sift Securities Ltd which then changed the name to Girvan Corporation Ltd.
P.Petersen, executive chairman, has received 188.5 million shares. The Girvan
group consisted of the holding company Girvan Corp. Ltd, Girvan Holdings Pty. Ltd
and its subsidiary, the long-established construction firm Girvan NSW Pty Ltd. The
complex corporate structure was a major factor in enabling managers to cover the
company's poor performance over the time, which has lead to the imminent collapse.
Executives were aware of the firm's severe cash flow problems, however, they
continued to increase its indebtedness to unsustainable levels. The result was that
liabilities by January 1990 mounted over assets at $650 million.
Measures to prevent Agency Problem
, Answer-
To adapt EVA financial management system,
There are basically three ways whereby an enterprise’s EVA can be improved
2. Increase net income without using more capital
3. Invest more capital as long as the return thereon is greater than the cost of that additional
capital
4. Liquidate capital or projects where the return is less than the cost thereof.
EVA is an all-embracing measure for the value which the managers of an enterprise
add or deduct from the capital employed. To link managers' bonuses with changes in
EVA links managers' remuneration directly to changes in shareholders' wealth. In
this way, the management of a company is "forced" to set their goals and actions on
economic shareholder wealth creation. The empirical section of this study reports on
the number of companies that uses the EVA financial management system.
Share option schemes
Employee stock option to Employee
Read More
Reply Reply to Comment
Collapse SubdiscussionAndre Chilton
Andre Chilton
Feb 15, 2021Feb 15 at 7:05am
Manage Discussion Entry
Hi Askew,
I read your post, and i appreciate your view but I just want to add that the constant
monitoring of the market by big investors and likelihood of being taken over by more
successful competitors, stimulate executives' desire to concentrate on maximising
firm's value. Alternatively, the agency problem may be solved by agency costs. They
include monitoring, bonding, opportunity and structuring expenditures. Such costs
are directed to monitoring the commitment of managers to behave in interests of
shareholders, foregoing their own enrichment at the expense of the company's
value. The conflicts of interest may arise involving other parties. For instance the
present shareholders vs potential shareholders. The shareholders may seek to urge
, the management to do certain things which may undermine its market stance, by
way insisting on paying out the dividends, money which might be needed to finance
projects which will benefit the company's value in future. In other words, firm may
lose its potential (future) shareholders as a result of actions of the present ones.
Reply Reply to Comment
Collapse SubdiscussionCamiesha Harmon-Askew
Camiesha Harmon-Askew
Feb 15, 2021Feb 15 at 7:39am
Manage Discussion Entry
Andre you make a great point. The performance of any commercial organisation
may be affected by the clash of interests of the parties involved. This is derived from
the existence of difference in goals. It is established that the ultimate goal of a
business activity within the firm is to maximise the wealth of its shareholders.
However, the interpretation of this postulate can vary significantly.
One of the main factors affecting the performance of a company is that owners of
listed companies are separated from the management. Since managers are granted
an enormous ability to influence on the actions of a company, they may be tempted
to commit certain acts that go against the company's value (and hence shareholders'
wealth). Primarily, these are cases when managers are preoccupied solely with
maximising their own wealth. The clash between interests of managers and those of
the company, which leads to the decreasing value of the firm, is known as agency
theory. The ways to preventing such situations are market forces and agency costs.
Reply Reply to Comment
Collapse SubdiscussionRussel Jankovik
Russel Jankovik
SundayFeb 21 at 2:03pm
, Manage Discussion Entry
Hello Andre,
You made some very nice points in your discussion response. Upon reading several
of my classmates threads, a common theme appeared that made me wonder why
the manager would forego his own self-interest for that of the shareholders, but the
way you explained it helped me to understand. If the manager isn't able to produce a
list of actions that they took to increase the shareholders interests, then they will just
replace that manager with a manager that will do as they see fit. I suppose you have
to remember who you're working for in any situation and what they would expect
from you.
Reply Reply to Comment
Collapse SubdiscussionGregory Valdez
Gregory Valdez
Feb 16, 2021Feb 16 at 11:33pm
Manage Discussion Entry
Hey Camiesha
A great post there. Very well articulated and to the point. I like how you defined the
concept of Agency problem. I would like also to add that the short-term and long-
term goals of the company's management and investors are not always aligned.
While stockholders aim at maximizing their wealth, the management is most likely to
have goals motivated by their gains. Otherwise, this is a great post. Good Luck
Gregory Valdez
Reply Reply to Comment
Collapse SubdiscussionBrett Johnson
and Corporate Governance
4343 unread replies.7272 replies.
Do some research and find some historical or current real-life examples of agency
problems. Will the measures discussed in the text help to prevent problems like your
examples in the future? What else would you advise? You may provide examples of
agency problems from your own experience. If you do that, be careful to provide enough
anonymity so that you won't get in trouble.
**For full credit reply to the prompt and to another student's response. You should have
two postings for your 20 points.
o Collapse SubdiscussionCamiesha Harmon-Askew
Camiesha Harmon-Askew
Feb 14, 2021Feb 14 at 4:57am
Manage Discussion Entry
The agency problem is a conflict of interest inherent in any relationship where one
party is expected to act in another's best interests. In corporate finance, the agency
problem usually refers to a conflict of interest between a company's management
and the company's stockholders. The manager, acting as the agent for the
shareholders, or principals, is supposed to make decisions that will maximize
shareholder wealth even though it is in the manager’s best interest to maximize his
own wealth.
In the case of Girvan Corp., there was a clear cut case of the clash between goals of
the management and shareholders. The intentions of the company's managers pose
questions from the very beginning, ie the formation of the Girvan machine. Girvan
Corporation Ltd became listed when it was acquired by a small publicly listed firm,
Sift Securities Ltd which then changed the name to Girvan Corporation Ltd.
P.Petersen, executive chairman, has received 188.5 million shares. The Girvan
group consisted of the holding company Girvan Corp. Ltd, Girvan Holdings Pty. Ltd
and its subsidiary, the long-established construction firm Girvan NSW Pty Ltd. The
complex corporate structure was a major factor in enabling managers to cover the
company's poor performance over the time, which has lead to the imminent collapse.
Executives were aware of the firm's severe cash flow problems, however, they
continued to increase its indebtedness to unsustainable levels. The result was that
liabilities by January 1990 mounted over assets at $650 million.
Measures to prevent Agency Problem
, Answer-
To adapt EVA financial management system,
There are basically three ways whereby an enterprise’s EVA can be improved
2. Increase net income without using more capital
3. Invest more capital as long as the return thereon is greater than the cost of that additional
capital
4. Liquidate capital or projects where the return is less than the cost thereof.
EVA is an all-embracing measure for the value which the managers of an enterprise
add or deduct from the capital employed. To link managers' bonuses with changes in
EVA links managers' remuneration directly to changes in shareholders' wealth. In
this way, the management of a company is "forced" to set their goals and actions on
economic shareholder wealth creation. The empirical section of this study reports on
the number of companies that uses the EVA financial management system.
Share option schemes
Employee stock option to Employee
Read More
Reply Reply to Comment
Collapse SubdiscussionAndre Chilton
Andre Chilton
Feb 15, 2021Feb 15 at 7:05am
Manage Discussion Entry
Hi Askew,
I read your post, and i appreciate your view but I just want to add that the constant
monitoring of the market by big investors and likelihood of being taken over by more
successful competitors, stimulate executives' desire to concentrate on maximising
firm's value. Alternatively, the agency problem may be solved by agency costs. They
include monitoring, bonding, opportunity and structuring expenditures. Such costs
are directed to monitoring the commitment of managers to behave in interests of
shareholders, foregoing their own enrichment at the expense of the company's
value. The conflicts of interest may arise involving other parties. For instance the
present shareholders vs potential shareholders. The shareholders may seek to urge
, the management to do certain things which may undermine its market stance, by
way insisting on paying out the dividends, money which might be needed to finance
projects which will benefit the company's value in future. In other words, firm may
lose its potential (future) shareholders as a result of actions of the present ones.
Reply Reply to Comment
Collapse SubdiscussionCamiesha Harmon-Askew
Camiesha Harmon-Askew
Feb 15, 2021Feb 15 at 7:39am
Manage Discussion Entry
Andre you make a great point. The performance of any commercial organisation
may be affected by the clash of interests of the parties involved. This is derived from
the existence of difference in goals. It is established that the ultimate goal of a
business activity within the firm is to maximise the wealth of its shareholders.
However, the interpretation of this postulate can vary significantly.
One of the main factors affecting the performance of a company is that owners of
listed companies are separated from the management. Since managers are granted
an enormous ability to influence on the actions of a company, they may be tempted
to commit certain acts that go against the company's value (and hence shareholders'
wealth). Primarily, these are cases when managers are preoccupied solely with
maximising their own wealth. The clash between interests of managers and those of
the company, which leads to the decreasing value of the firm, is known as agency
theory. The ways to preventing such situations are market forces and agency costs.
Reply Reply to Comment
Collapse SubdiscussionRussel Jankovik
Russel Jankovik
SundayFeb 21 at 2:03pm
, Manage Discussion Entry
Hello Andre,
You made some very nice points in your discussion response. Upon reading several
of my classmates threads, a common theme appeared that made me wonder why
the manager would forego his own self-interest for that of the shareholders, but the
way you explained it helped me to understand. If the manager isn't able to produce a
list of actions that they took to increase the shareholders interests, then they will just
replace that manager with a manager that will do as they see fit. I suppose you have
to remember who you're working for in any situation and what they would expect
from you.
Reply Reply to Comment
Collapse SubdiscussionGregory Valdez
Gregory Valdez
Feb 16, 2021Feb 16 at 11:33pm
Manage Discussion Entry
Hey Camiesha
A great post there. Very well articulated and to the point. I like how you defined the
concept of Agency problem. I would like also to add that the short-term and long-
term goals of the company's management and investors are not always aligned.
While stockholders aim at maximizing their wealth, the management is most likely to
have goals motivated by their gains. Otherwise, this is a great post. Good Luck
Gregory Valdez
Reply Reply to Comment
Collapse SubdiscussionBrett Johnson
