1. Problem Identification [10 marks] a) In your own words, briefly discuss the agency conflicts between shareholders and managers (Maximum 200 words). b) In your own words, briefly discuss the governance mechanism examined in each paper that can potentially affect shareholder value and/or how the stock market reacts to the news of such governance changes (Maximum 200 words). Agency Conflicts.
- Problem Identification
The relationship between shareholders and managers is considered a contentious conflict in their interests. Shareholders are the principals while managers are the passive agents who are obliged to advance the interest of the shareholders. Agency problem therefore defines the conflict between shareholders and managers because each is trying to serve their interests (Becker 2006). Although shareholders are the real owners of the company, they cannot be involved in the day to day running of the organization because they may be dispersed in different geographical locates or lack skills to do so. Therefore, they elect a board of directors to oversee the management of the company. The interest of the shareholders is to increase their investment. On the other hand, the managers are employees of the company who acts as the agents of the shareholders. They are individually interested in personal wealth, salaries, fridge benefits, security, and others. In pursuit of these personal interests, managers may get compromise to pursue personal interest resulting in loss of shareholders’ investment.……… Agency Conflicts.
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