Corporate Management and Shareholders - Assignment Example

The paper "Corporate Management and Shareholders" is a great example of an assignment on finance and accounting. An agency problem arises when there is a conflict of interest and goals between different people with the same objective. It refers to the relationship between a principal (shareholders) and his agent (corporate management). Agents are employed by principals to carry out a task on their behalf. The agency problem is concerned with the difficulties in motivating one party or agent to act in the best interest of the other party (i.e. the principal), rather than doing so in their own interest.

It occurs when cooperating parties have different goals and interests. When the agent fails to consider and fulfill the needs of his principal entity, the problem occurs. In finance, it mostly relates to the conflict between Corporate management and shareholders Shareholders, and bondholders For the purpose of this case study, the agency problem between corporate management and shareholders is taken into consideration. While directors control the company, the shareholders own it. The problem arises when the directors tend to forget that and stop acting in the best of shareholders’ interest.

This is the root cause of the agency problem. When the parties concerned have asymmetric information in a way, where the agent has more information than the principal, the problem arises instantly. Therefore, the principal cannot ensure that the agent is working in the best of his interest. Reasons for conflict of interest between shareholders and management: The main aim of the management is to maximize the wealth of the shareholders. When the management fails to fulfill the criterion for their own interest, conflict arises between shareholders and the management.

Also, in the past, the management had a divergence of interest from that of the shareholders due to differences in their goals. Corporate management and shareholders: For large firms, shares are likely to be diversely held. Therefore, in such circumstances, the actions of shareholders are most likely to be restricted. The responsibility for running the business will be with the board of directors or management, in short.