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Disclosure And Agency Conflict

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Question:

Describe about  management’s goals ever conflict with maximizing shareholder wealth?

 

Answer:

Maximizing the wealth of the share holder’s is the appropriate goal of the business firm. The business firms try to maximize the wealth of the firm by increasing the price of the stock. With the increase in the price of the stock, there is an increase in the stock wealth. The increase in the price of the stock enhances the value of the firm and the net worth of the individuals increase owning the stock. There are instances in which the goal of the management conflicts with maximizing the share holder wealth (Hamel, 2009). The goal of the management is mobilization of the resources to make them productive which will generate revenue for the organization. The model of management that predominated earlier has become redundant. The overriding problems of the organization were solved by reinvention of the management system. The management system has become innovative and inspiring place which is concerned with maximizing the wealth of the share holders. But there have been situations of conflict with the maximization of the wealth of the share holder. One of the major false hoods that are associated with the publicly held companies is that it has the obligation to maximize the value of the share holder. In 2007, the companies of United States had taken debt of record amount to fund the repurchase of share to enhance the value of the share holder. These buybacks has served to enrich the CEO of the company at the expense of the important stake holders of the company. This diminishes the health of the economy and the long term future of the organization is affected. Maximizing the value of the shareholder has become a shared goal that aligns to serve the interest of the share owners and the management. Thus maximizing the value of the share holder is not the obligation of the manager but it is the choice of the manager. But in cases of take over and bankruptcy there are special laws to provide special consideration to the common stock holders (forbes.com, 2011).

 

In case of small organizations, the manager of the firm owns the firm. In such cases there the conflicting situations does not arise. But in case of large organizations there are various levels of the management and the staff. But the management is not the owner of the firm (Harris and Glegg, 2009). They have a fixed level of income. But there are situations of conflict between the owner of the firm and the manager of the organization. The manager of the organization do not profit directly from the share holders unless they tend to own a stock. The conflict between the managers and the stock holders of the firm gives rise to the agency problem (Myers, 2007). The goal of the management is to maximize the wealth of the share holders and at the same time maintain the corporate social responsibility. But it is seen in several cases it is seen that the maximization the share holder’s wealth does not align with the social responsibilities of the company (Black, 2012).

For example in the 2008 recession there was a big bank failure. But the social responsibility of the banks was not visible. The firms were thinking of managing their investment portfolio instead of lending money to the customers. The investment portfolio was filled with toxic assets which led to the breakdown of the large banks. This led to the fall of the share prices. Thus it can be said that the organization was trying to meet their management objectives without maximizing the wealth of the share holders. This leads to the situations of conflict between the share holders and management of the organization. This aggravates the agency problem (Snowden, 2014).

The manager of the organization have personal goals that tend to conflict with the goal of the owner of maximizing the wealth of the share holders. Since the share holders have the authority on the managers to administer the asset of the firms, there arises a potential conflict between the share holders of the organization and the management goals. In imperfect labor and capital markets, the managers maximize their own utility at the expense of the share holders of the organization. Agency conflicts are quite significant in organizations.

 

References

Black, K. (2012). Disclosure and Agency Conflict: Evidence from Mutual Fund Commission Bundling. CFA Digest, 42(3), pp.126-128.

forbes.com, (2011). The Dumbest Idea In The World: Maximizing Shareholder Value. [online] Available at: https://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/ [Accessed 12 Mar. 2015].

Hamel, G. (2009). 25 Stretch Goals for Management. [online] Harvard Business Review. Available at: https://hbr.org/2009/02/25-stretch-goals-for-managemen [Accessed 12 Mar. 2015].

Harris, O. and Glegg, C. (2009). Governance quality and privately negotiated stock repurchases: Evidence of agency conflict. Journal of Banking & Finance, 33(2), pp.317-325.

Myers, D. (2007). Costs and Benefits of American Corporate Capitalism. Psychological Inquiry, 18(1), pp.43-47.

Snowden, N. (2014). What really caused the Great Recession? Rhyme and repetition in a theme from the 1930s. Cambridge Journal of Economics.

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