Agency Theory and Corporate Governance Problem Essay

Agency Theory and Corporate Governance Problem - Essay Example It is evidently clear from the discussion that the Agency theory conceptualizes the relationship between the firm managers and shareholders as a â€Å"nexus of contract† that is bound to result to conflict due to the different interests of each group. The proposal of this theory is that firms should have independent board structures and that the equity-based compensation for top executives should be applied to curb the aggressive behavior of the management. While this theory suffers a number of weaknesses by assuming perfect organizational structures, it provides a possible approach to a solution of the corporate governance problem. On this ground, agency theory, to a great extent provides workable solutions that can harmonize the interests of both the managers and company stakeholders. Corporate structures are characterized by a separation between the owners and the management of an organization. The owners of an organization appoint managers who are better versed with manage ment knowledge to run their business for payment. The expectation of the shareholders is that the managers run the organizations to the best interests of the shareholders at all times. However, there is the risk that the management may put their goals first before those of the firm, which would be contradictory to their duties. As expected, the managers are the information bearers and have for the power to influence the firm performance and profit through their strategic initiatives. From a different angle, the shareholders have little information and hence act in good faith expecting that the management will pursue the firm interests. However, it is hard for them to establish whether the management influenced the outcomes of their firms through economic manipulation. Ultimately, the shareholders wish to submit the business risks to the experts with the sole aim of maximizing the share values for their own benefits. Contrary, the manager’s goals may be against the shareholder 's interest as they seek to maximize the benefits they accrue from the organization.