Agency Theory Of Corporate Governance Case Analysis

The key corporate view of finance is to ensure that the shareholders’ wealth is maximized. This at times is not realized because the shareholders, who are the owners of the firm, do assign duties of control to the managers of the firm. The managers therefore, act as agents to their principals (shareholders). The shareholders delegate all the duties to the management and directors of the firms due to a number of reasons for instance; they may be distant from the company location and might be involved in other tasks that cannot allow them to run the business. As a result, the managers make all strategic decisions that affect the shareholders’ well-being.
A conflict of interest may arise due to this separation of ownership and control (Pandey, 2010). Therefore, Agency Theory of Corporate Governance tries to illustrate how managers can maximize their own wealth at the expense of the shareholders. Finally it develops rules and incentives based on the contracts given to the management, so as to minimize or eliminate the conflicts of interests between management of corporations and their owners.
The Agency problem is linked to several causes by either the shareholders’ mistake or the executive making. One of them is distortion of information by the managers such that asymmetric information reaches other employees and in turn affects the
This is because the managers tend to take actions in their own best interests that are unobservable by and detrimental to the shareholders. For instance, some managers might employ “window dressing” techniques to make their financial statements look stronger. Perfect monitoring of management behavior and actions by the shareholders can reduce this agency problem, but it involves high costs. Therefore, many shareholders fail to monitor the executives’ behaviors which affect the firm in a negative