Agency Problem Managers vs Shareholders

Table of content

Preface………………………………………………………………….1

Chapter 1. Prerequisites of the agency problem and different approaches to solving it

1. How we detect an agency problem……………………………………..3

2. Remedies of agency problem…………………………………………….5

3. Different approach for different types of companies……………….10

Chapter 2. Practical examples of agency problem's solution

2.1 Good intentions usually backfire……………………………………….13

2.2 Positive examples and new ideas………………………………….........17

2.3 Foregoing research: “pay-for-performance” for employees and compensation consultants………………………………………………………………………19

Chapter 3. Findings……………………………………………………………21

Conclusion………………………………………………………………………24

List of used literature…………………………………………………………..26

Preface

On the modern market there are different types of entities, and even though small and some of middle – sized companies are founded as sole entrepreneurs and LLC, all big or multinational companies, which have the largest market shares and values, are chartered as joint-stock companies, as far as joint capital is one of the most easily obtained, managed and with a moderate cost. The genius of public corporations stems from their capacity to allow efficient sharing or spreading of risk among many investors, who appoint a professional manager run the company on the behalf of shareholders.

However, the public corporation has a key weakness - namely, the conflicts of interest between managers and shareholders. The separation of the company’s ownership and control, which is especially prevalent where corporate ownership is highly diffused, gives rise to possible conflicts between shareholders and managers. In theory, shareholders elect the board of directors of the company, which in turn hires managers to run the company for the interests of shareholders. Managers are supposed to be agents working for their principals, that is, shareholders, who are the real owners of the company. In a public company with diffused ownership, the...