Agency Problem

in Corporate
Governance
 Agency Theory

Suggeststhat firm can be viewed as a loosely

defined contract between resource providers
and resource controllers.

Occurs when one or more individuals called

principals employ one or more individuals
called agents, to carry out some service and
then entrust decision-making to the agents.
 Principal-Agent Specific
Issues
I. Diversification vs. Dividends

- This is a issue about how to manage free cash

flows, because managers want this funds to be
invested in additional product diversification while
shareholders prefer this funds to be declared as
dividends so long as it is backed by income.
II. Managerial Opportunism

- Occurs when agents chose to use funds to

unrelated diversification and growth which leads
to increase in compensation income of
managers while decrease the dividends declared
to shareholders.
III. Power Supremacy vs. Technical
Expertise

- Some of the corporate investors, most

especially institutional investors, are just putting
their money with expectation of dividend at a
certain time. The nature of their intention made
them rely only on expertise of the agents. It is a
clear picture of agents doing the real things and
principals waiting for the ultimate result.
IV. Trust

- Shareholders have more trust than doubts

to the agents and they are entrusting everything
as far as operation including the charting of the
corporations future to its directors and officers.
This is another issue because the trusts given to
the agents will make them comfortable and
make them lose their balance. Which is also an
essential component of managerial opportunism