Agency Relationship: Definition, Types & Examples

Question 1 

An agency relationship is a type of relationship that involves manifestation and consent between an agent and the principal based on the agreement, especially in terms of control. For instance, an employee (agent) agrees to work for the employer (principal). Agency conflict cannot exist when I am the only employee and investor in the company because there is no agent. 

Question 2 

Agency problem is likely to emerge when I expanded and hired additional people because the employees will be forced to work in my best interest to their employers, which can create some conflicts. 

Question 3 

Owner Vs shareholders are the type of agency conflict that can come up when I sell some stock to outside investors. Outside investors will have the interest of controlling some operations in the company while I will be interested in the making some steps that enhance the growth of the firm, even if it is risky to shareholders ( Jerzemowska, 2006) . 

Question 4 

The cost of bankruptcy and reduction of free cash flow in the company are the main agency costs that are likely to occur when my company raises funds from outside lender. Lenders can easily mitigate agency costs by putting in place restrictive covenants in the debt agreement to enhance surety of their loans. 

Question 5 

The six potential managerial behaviors that can harm a firm’s value include: 

Fear of employees to disagree with managers due to the possibility of reprisal 

Giving personal agenda priority over well-being of the firm 

Failure to reward employees based on merit, leading to reduced performance 

Manager can be risk averse to avoid mistakes or failure 

Managers can earn a significant amount of nonpecuniary benefits 

Managers can avoid difficult or complex decisions. 

Question 6 

Corporate governance refers to the management of the interests of stakeholders such as shareholders, customers, management, and employees ( Carlin, 2000) . The five corporate governance provisions that are internal to a firm include: 

Monitoring 

Provision of charter and bylaws 

Remuneration plans 

Financial control techniques 

Structuring of capital choices 

Question 7 

Characteristics of board directors include that lead to effective corporate governance includes: 

Appropriate compensation of board members 

CEO should not chair the board 

Board membership is large 

Question 8 

Targeted buying of shares 

Shareholder right provision 

Restricting right of voting. 

Question 9 

The use of the stock option in a compensation plan refers to the process of offering owners of a firm to purchase firm’s stock at a given price, which is always lower. One of the main dangers of this move is that it can make a manager to give a wrong financial statement. 

Question 10 

Block ownership refers to a situation when outside investors control and own a significant amount of firm’s shares. Block ownership can improve the performance of a firm by closely monitoring the management. 

Question 11 

Regulatory agencies and legal systems affect corporate governance by giving investors the opportunity to access financial markets while at the same time they can assist in lowering the cost of equity. 

References 

Carlin, W. (2000). Empirical analysis of corporate governance in transition. In Privatization, Corporate Governance and the Emergence of Markets (pp. 98-122). Palgrave Macmillan UK. 

Jerzemowska, M. (2006). The main agency problems and their consequences. Acta Oeconomica Pragensia , 2006 (3), 9-17.