3. Principal-Agent and Other Relationships in Corporate Governance
c. describe principal-agent and other relationships in corporate governance and the conflicts that may arise in these relationships;
In shareholder and manager relationships what is a principal and what is an agent?
- Principal - the person delegating authority
- Agent - the person to whom the authority is delegated
In agency theory, what are two reasons why managers do not always act in the best interests of shareholders?
- Managers and shareholders may have different goals. They may also have different attitudes towards risk.
- Information asymmetry. Managers almost always have more information than shareholders. Thus, it is difficult for shareholders to measure managers' performance or to hold them accountable for their performance.
What is information asymmetry?
When one party has more information than another
If a firm as two classes of shares, Class A has voting rights, Class B does not have voting rights - what is the likely consequence of how a management team thinks about the shareholders?
The management team is more likely to focus on the interests of Class A shareholders and Class B shareholders interests may suffer as a result.