This is to inform that Graded Discussion Board (GDB) No. 01 will be opened on November 17, 2015 for discussion and last date for posting your discussion will be November 20, 2015.
Topic/Area for Discussion
“Agency Problem”
This Graded Discussion Board will cover lesson # 1 to 10.
Discussion Question:
The primary role of management in any firm is to act in the best interest of the owners to maximize their wealth. But, generally the management makes decisions to promote their own interests which may conflict with the owners’ interests. This practice creates agency problem. However, the firm’s owners can develop a system to minimize this conflict.
Being the student of business finance, discuss briefly the ways which may assist the owners for developing a system to counter agency problem.
Note:
For acquiring the relevant knowledge, do not rely only on handouts but also watch the course video lectures and read additional material available online or in any other mode.
Solution
In corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth. However, it is in the manager's own best interest to maximize his own wealth. While it is not possible to eliminate the agency problem completely, the manager can be motivated to act in the shareholders' best interests through incentives such as performance-based compensation, direct influence by shareholders, the threat of firing and the threat of takeovers.