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Advanced business economics - Essay Example

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Organizations are physical and even ‘virtual’ setups, where ‘collage’ of humans will work taking different roles and responsibilities.Starting from lower level workers to shareholders, top level management, etcan organization comprises of people with skill and experience, who accomplish their given task…
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Advanced business economics
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Advanced business economics

Download file to see previous pages... Organizations are physical and even ‘virtual’ setups, where ‘collage’ of humans will work taking different roles and responsibilities.Starting from lower level workers to shareholders, top level management, etcan organization comprises of people with skill and experience, who accomplish their given task. Although, all these people will work in-group for the effective functioning of the organization, there will be an hierarchy. This hierarchy defines the position of the various people inside the organization, with one section of people calling the shots and asking the other sections to function according to their ‘diktats’. This segregation of individuals, according to their role in the establishment and functioning of organization, only leads to the principal-agent relationship, which is particularly visible in the shareholder-manager relationship. In organizational context, the term principal is given to an individual or individuals who have the authority to hire other individuals to accomplish the set tasks because of their investments and other inputs. The hired individuals, whose duty is to comprehend and carry out the instructions of the principal is known as the agents. This exact principal-agent relationship will be visible in the shareholders and managers relationship, with the shareholders acting as the principal and making the managers work according to their instructions....
However, when viewed from another perspective, this change in equation in the principal-agent relationship, with manager dominating the affairs could lead to problems for the organization, or in particular shareholders. That is, if the shareholders are not equipped to oversee and control the managers, the managers could indulge in actions that may be self-centric, pushing back the organizational goals to the background. Every manager could have personal goals, when he/she is working for the organization. Some times or maximum times, those goals could be in conflict with the owner's or organization’s goals. “The principal-agent problem arises within the firm when ownership and control are separated and the self-interest of managers may lead them to act other than in the interest of the shareholders.” (Lipsey and Chrystal 2007). This is in line with the Agency theory, which suggests that managers could seek to maximize their goals and benefits, at the expense of shareholders. The agents or managers will be able to act in a self-centred manner, as they have stronger asymmetric information, thereby causing troubles to the organizations. “Agents have the ability to operate in their own self-interest rather than in the best interests of the firm because of asymmetric information (e.g., managers know better than shareholders whether they are capable of meeting the shareholders' objectives) and uncertainty.” (Kleiman). The managers could act in a self-interested manner, when it comes to utilizing or ‘consuming’ corporate resources like allocating higher pays, incentives, etc. Even while viewing the supposed detrimental actions of the managers, there are also other aspects, in which the managers can exhibit positive behaviour, thereby taking the ...Download file to see next pagesRead More
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