Week 8 Discussion

Discussion 1: What Do Agency Costs Mean to You?

Agency theory is a concept that implies a firm can be viewed as an interconnected network of contracts among resource holders. An agency relationship is created whenever one or more individuals, entitled principals, hire one or more other individuals, called agents, to perform services and then delegate decision-making authority to the agents. The fundamental agency relationships in the world of business are those that exist between (a) stockholders (owners) and managers and (b) between debt holders (lenders) and stockholders. These relationships are not necessarily compatible; indeed, quite often, you will encounter agency conflicts, or conflicts of interest between agents and principals.

Conflicts occur when either party does not act in the best, long-term interest of the other. In order to mitigate conflicts, principal-agent relationships incur agency costs, that is, expenses incurred to form and maintain a healthy principal-agency relationship (e.g., furnishing performance incentives to motivate managers to act in shareholder interests). Usually, agency costs will often tie executive compensation to performance, but some monitoring is also undertaken to make sure long-term goals are not sacrificed for short term gains. In addition to monitoring performance, the following programs are attempts to motivate managers to act in shareholder interests: (1) performance-based incentive plans, (2) direct intervention by shareholders, (3) the threat of firing, and (4) the threat of takeover.

To prepare for this Discussion think about your firm or a firm with which you are familiar. Next, consider three programs that are funded by that firm and note each of their agency costs. Thenpost by Day 3your responses to the following:

• Identify the three programs funded by your selected firm, and each programs agency costs. These are the internal costs to the firm intended to mitigate self-interested behaviors of agents that conflict with the firms overall objectives, values, and goals.
• Explain the effectiveness of each of the three programs you have identified in terms of promoting ethical behaviors and decisions that enhance firm-value over self-interest.
• Explain the potential shortcomings of each of the programs you have identified in terms of promoting shareholder interests and business ethics.

In your post, use caution concerning confidential information. Be careful not to reveal any information that could harm the firm or any individuals associated with the firm, including you. Use pseudonyms for the firm and individuals to protect identities, and err on the side of caution in revealing any details.