Agency Theory Questions

Agency Theory Questions

1. Agency Theory, Ethics and Corporate Governance (pg 249-255 & pg 260-267)

1. In your opinion, do you believe it’s possible to be both self-interested and altruistic? Explain.

Yes, I believe that it is possible to be both self-interested and altruistic. Altruism is the belief in or practice of disinterested and selfless concern for the well-being of others (Wikipedia.com). Self-interest is one's personal interest or advantage, especially when pursued without regard for others (Wikipedia.com). While these two words seem to mean completely opposite things, a person can be both. Being selfless can be motivated by being self-interested. Take giving gifts as an example, if you buy someone a great gift because you know they’ll love it (and you know, in return, they’ll also give you a great gift), then you are both acting on behalf of the well-being of the person and the well-being of yourself. Even though you are doing something that seem selfless, for the sake of another, intuitively you are really only concerned about how you are affected in the end.

1. The article says the principal or ‘shareholder’ in corporate governance is causing the agency problem. Who do you believe is causing the agency problem? The agent or the principal? Explain.

The main problem is the asymmetrical information between a principal and an agent. An agent is hired in the first place largely because an agent can carry out the tasks a principal may not be able to perform due to lack of time commitment, skillsets or specific knowledge to run the business (Ah Kim, 2016). I personally believe that the agent is responsible for causing the agency problem. I do think that the agent wants to act in the best interest for the principal (shareholder) but while this seems to be innocent, there is also an underlying knowledge that by helping the shareholders, the managers/CEOs are also helping themselves. We know that a lot of upper-level management is paid bonuses based on quarter end numbers and monetarily based goals. By increasing the stock price, or value of the company in some way, the management is being rewarded for a job well done while also making their shareholders happy.

1. Based on the article, why would there be little to no room for ethics in the workplace based on the agency theory? Do you agree? Explain

Based on the agency theory, there is little to no room for ethics in the workplace because of self-interested opportunism. Roberts argues that the opportunism of executives can only remedied through a mixture of increased independent monitoring, sharper sanctions, and more appropriately targeted incentives that avoid ‘reward for failure’ (253). Roberts pursues a somewhat more complex line of argument by suggesting that human nature – both ‘good’ and ‘bad’ has itself to be understood as something that is produced and reproduced and from this we cannot know in advance about human nature (254). The lesson that screams at us from the Enron and Worldcom scandals is that self-interested opportunism is alive and well within the boardroom. But if this is understood not simply as cause but also as an effect of corporate governance practices then this might allow a better, or in any case different, understanding of the ‘problem’ and its remedies, including the place, actual or potential, for ethics in corporate governance (Roberts 254).

1. Is self-interested opportunism necessarily unethical? If not, at what point does it become unethical?

I, personally, do not believe self-interested opportunism is unethical unless unethical practices are involved. I think it’s okay to want to do good for someone else while also bettering yourself along the way. Keep in mind, a line is drawn if you are abusing knowledge or someone else in order to achieve said goals. These unethical practices could be to enhance the performance of something for a better outcome, for both the agent and principal.

1. Corporate Social Disclosure: A Note On a Test of Agency Theory

1. From reading this article, what do you believe to be the role of agency theory with the managers of oil companies and their shareholders? Is it different than other industries? Explain.

I believe that the role of agency theory in this situation was to disclose social information to increase the welfare of the management.  Because managers bear agency costs, they want shareholders to see that they are acting in their best interests and in this case, the environment’s interest as well. With the oil industry being known for damaging the environment, this test was conducted to see if managers made sure to disclose/focus on environment related social performances. This is different than other industries because the oil industry has to deal with natural resources where as someone in the candy industry does not. This being said, each industry has their own specific reporting items that they feel the need to disclose to their shareholders. Therefore, agency theory, while being different, is existent in all industries.  

1. In the first study, it shows that oil companies are more likely to disclose environment-related information, more so than all other companies. Why do you believe this to be true? Or not to be true? Why do you think companies report social disclosures? What does the agency theory say about social disclosure with regards to management? Do you agree? Explain.

Based on what I have read in this article, I do believe this to be true. Because the oil industry is perceived to be prone to damaging the environment, their management places a high emphasis on environment-related disclosures in annual reports (Ness 215). I think that the industries, like the oil/natural gas, etc., are probably more likely to really emphasis the environmental aspects than say, the consumer goods industry because they are affecting multiple aspects of the ecosystems. I believe that companies report social disclosure to keep their owners aware of the impacts that their company is having on the environment, the people, and themselves. This increases the credibility of the firm and the managers because it shows that even in bad times, they are willing to be upfront. According to agency theory, such actions of management indicated that social information is disclosed to increase the welfare of management (Ness 215). I also agree with this statement with regards to my comment on the credibility of the managers.

1. Do you believe that all companies should report social disclosures or only the companies that affect the environment? Why do you have this view?

I believe that all companies should report social disclosures. I do not think that it should be a regulated topic in the financial statements but I do believe that if a company is having an impact on either the environment or the public then there should be a disclose about it. Keep in mind, not all social disclosure have to do with the environment. I think that it helps us, as a potential investors, and also the company disclosing because it allows a sense of transparency that is needed on such topics.

1. What are some of the limitations of the study? Could these limitations skew the results?

Some of the limitations of the study were as follows:

1. Toward a Stewardship Theory of Management (pg 20-26)

1. Define a rational actor and what he/she will strive to maximize.  What kinds of problems could this present in a principal/agent relationship?  Is this relationship between rational actors, along with its problems, necessarily ethical or unethical? Explain.

A rational actor is someone who acts within the rational choice theory. The rational choice theory is an economic principle that assumes that individuals always make prudent and logical decisions that provide them with the highest amount of personal utility. Bounded rationality on the part of each actor gives rise to information asymmetry between the parties (Arthurs 147). This information asymmetry may allow an entrepreneur to engage in opportunistic behavior, more specifically, adverse selection or moral hazard (Arthurs 147). Adverse selection is where the agent has inside information that they are unwilling to share with the principal, in order to gain a competitive advantage. Moral hazard is a lack of effort by the agent, which adversely affects the principal. Research suggests that VCs sometimes become friends and close confidants of entrepreneurs; indeed, entrepreneurs often desire even more involvement with their VCs (Arthurs 152). From this positive involvement, more positive behavior evolves and trust becomes a huge role. This is the dominant ethic of the relationship. Using the assumptions from agency theory, researchers examining the behaviors of each party during those time periods when trust is likely high between the VC and entrepreneur would have an increased chance of obtaining non-significant results (Arthurs 152). I believe the relationship, depending on the end-goal, can be both ethical or unethical.