Creditors have a claim the firm’s earnings stream, and they have a claim on its assets in the event of bankruptcy, however, through managers stockholders have control of decisions that affect the riskiness of the firm. (Brigham and Daves, 2003) Investopedia (2014) reports that since stockholders will makes decisions based on their best interests, a potential agency problem exists between the stockholders and creditors, for example managers could borrow money to repurchase shares to lower the corporation’s share base and increase shareholder return. Stockholders will benefit, however, creditors will be concerned given the increase in debt that will affect future cash flows. Solutions to the agency problem between: Shareholders and
These benefits, however, are available because the corporate structure separates ownership from control. Stockholders, the owners of a corporation, do not directly control the interests of a firm. They hire managers to act on their behalf, the classic principal-agent relationship. However, the relationship is actually a bit more complicated. The owners do not hire the employees of a company themselves.
The agency theory describes the relation between two parties, principals and agents (Jensen & William, 1976). Principals are recognized as Shareholders while Agents as company’s executives. The agency theory also discusses how to organize this relation between these two parties in a decent approach so one of them determines the work while the other party does the work (Jensen & William, 1976). It is known also that the principal hires an agent to do the work. For example, in companies, the principals are the shareholders of the company, delegating to the agent (CEO), to accomplish tasks on their behalf.
For the sake of Strong Tie, the company should look into either concentrating its sales efforts or expanding their market. Liquidity recommendations include increasing net sales and preventing further decline in current and cash ratio. Even though the current ratio is declining from previous years and below the industry’s average. The 3.13 current ratio value implies that Strong Tie could pay all its short-term debts by liquidating roughly a third of their current assets. Preventing decline will help the firm meet its short term obligations.
This review aims to shed light on how board of directors’ behaviours are explained by stewardship theory. There are several theories explaining operation of board of directors’ and their behaviours: agency theory, stewardship theory, resource dependency theory, behavioural theory, social contract theory and legitimacy theory. This paper explores stewardship theory and resource dependency theory to understand operation of board of directors’ and their behaviour. Stewardship theory exists as alternative to agency theory as it has some limitations. Stewardship theory explains how psychological factors affect top managers to work towards same interests of shareholders and organisation.
Agency Theory’s central premise is the assumption that the interests of two participants, who enter a contractual relationship, diverge. In AT, the two parties in this relationship are known as the principal and the agent. The principal requires the agent(s) to perform a number of delegated tasks and thus attributes some decision-making authority to him/her (Bergen et al., 1992; Eisenhardt, 1989; Jensen and Meckling, 1976). While this relationship acts as a utility maximizer for both partners, the agent may not always perform his/her tasks as demanded by the
Functional structure model compels the heads of departments to obtain permission of the CEO before taking important decisions, thereby affecting the profitability of the organization. The CEO is not able to concentrate on the most important aspects of the organization, as he or she needs to analyze the issues including sales, recruitment, and marketing. Conversely, the hybrid structure with individual business units is more effective, as it grants autonomy to them to make a decision, thereby assisting them to improve their performance. When compared with the functional model, the hybrid model gives flexibility to the organization. It can modify its strategy to deal with the changes in the market conditions.
8.Easy price comparison forces companies to set their prices competitively which is a positive point for customers. 9.Stable prices in the market helps customers plan and stabilize their expenditure, which in turn may lead to stabilization of trade cycle. Disadvantages of Oligopoly 1.Setting of prices may be advantageous for the firms, but if done unrealistically, it may prove to be a great disadvantage for consumers. 2.Creative ideas or plans of small businesses in the oligopolistic market fail to realize because they cannot overcome the control of major market players. Their realization is only possible when one of the major player adopts it for use.
Another feature of this new management philosophy is that managers are rewarded by their contribution to long-term value creation for shareholders, rather than an increase in short-term performance indicators. At the same time, managers should be inclined to scrap and salvage inefficient subsidiaries that are not creating value, but just adequate profit in accounting ledgers. In these situations, conflict between managers and shareholders arises, also known as the agency problem
Agency theory is an analytic expression of the contractual relationship of two or more parties, in which one party, designated as the principal, engages another party, designated as the agent, to perform some form of services on behalf of the principal (Jensen & Meckling 1976). The agency theory is, however, related to the fact that enterprise risk management (ERM) can help an organization to achieve its business objectives and ultimately maximize shareholders’ value (Bowen et al, 2006; Nocco & Stulz, 2006). In other words, the cost of each agency will be reduced because of higher performance of firms (Uadiale, 2010). ERM can align with the business assumptions and proactively help in overcoming the possibilities of the business failures (Gupta, 2011). Foreseeable threats can result to problems and crises; while, achievable opportunities can mislead to loss of benefits (Hillson and Murray-Webster, 2007).