Case Analysis of Agency Theory and Corporate Governance

Case analysis of Agency Theory and Corporate Governance

A market economy is a tool—a valuable and effective tool—for organizing productive activity. A market society is a way of life in which market values seep into every aspect of human endeavor. It’s a place where social relations are made over in the image of the market.

---MICHAEL J. SANDEL, What isn’t for sale?

According to Mary C. Gentile in Agency Theory and Corporate Governance, the incongruence between shareholders and management results in a conflict of interest between the principal and the agent which means that the agent is closely linked with the principal by incentive contracts. However, the development target for them are different. Take stockholders and management as an illustration; the goal that stockholders pursue is the profit maximization, while the management tries their best to pursue the maximum profitableness in order to cater to the stockholder and then obtain the bonus. In other words, the management is rewarding profit maximization but is hoping for the certain payment, which will lead to the inconsistency of the development goals.

In this case, the main stakeholders are Daniel and the new board member on the compensation committee. The main argument that Daniel is trying to counter is the issue of instituting an incentive component of pay for management that is tied explicitly with the firm’s market performance. On the contrary, Daniel holds a different view that retains a culture that emphasizes the firm’s historical competitive advantage---which is developing innovative products that serve the public trust. He is now the Director of Product Development as well as a member of a group of founding scientists of biotechnology, and this double identity gives him an important role in decision making.

To make a rational judgment, Daniel has to consider the advantages and disadvantages of both policies. First, Daniel...