Methodologies of Mitigating the Agency Problem

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Methodologies of Mitigating the Agency Problem

A dispute of interest exists in any connection in which one person is expected to work for the good of the other. In financial analysis, agency issues are normally defined as potential conflicts between the administration and shareholders. The administrator, acting as a representative for the stakeholders, or founders, is obligated to take actions that enhance shareholder value, even if it is in the executives greatest advantage is to optimize their income. This paper aims to discuss the various devices used in mitigating the agency problem that arises due to a conflict of interest between management and the shareholders of a company.

First, through independently auditing the firms accounting statements, potential agency problem between shareholders and the administration is mitigated. Audits perform a critical economic function and contribute significantly to the public good by enhancing transparency and reestablishing trustworthiness in accounting information. Independent auditors are self-employed or operate for a certified public accounting firm. The auditor will issue an opinion on the dependability and objectivity of an institutions financial statements and subsequently conveys the findings to shareholders, lenders, and government entities.

Second, principal-agent interactions can be managed and are frequently controlled through agreements or legislation in the context of fiduciary ties. The Fiduciary doctrine illustrates an endeavor to govern the emerging agency conflicts in financial advisor-client relationships. The objective is to safeguard investors against consultants who disclose any possible conflict of interest. Third, systems of reputation act as an efficient tool that helps mitigate the agency problem. A significant force in any voluntary marketplace, the reputation strategy incentivizes the administration and stakeholders to coordinate their activities with minimal information and credibility. There are multiple reputation-based connections, the most general of which is referred to as workplace culture.

Forth, shareholder activism is a method by which investors can exert decisions on a companys conduct by exploiting their fractional ownership rights. Radical stakeholders frequently seek to seize ownership of the firm, oust administration, or compel a significant corporate reform. By regularly reviewing the organizational entitys operations, shareholder activism promotes effectiveness. Finally, through the market for corporate control, agency problems within an organization may be reduced. The aggressive acquisition is the most consistent manifestation of macroeconomic stability for business executives. By failing to recognize a companys prospective worth, ineffective administrators create the opportunity for superior executives to take over and enhance efficiency, thus minimizing agency conflicts.

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