1.3 Agency Problems
代理问题是指代理人和委托人在利益上存在潜在的冲突。
Agency problems refer to the potential conflicts between principal and agent. It may exist among stakeholders, manager and employee, creditor and borrower. For example, just as shareholders need to encourage managers to work for the shareholders' interests, so senior management needs to think about how to motivate everyone else in the company. In this case, senior managements are the principlas and other employees are their agents. Yet the largest concern has been drawn to the conflict between manager and shareholder, which may undermine the achievement of the company's goal.
1.3.1 Separation of Ownership and Control
The most distinguishing feature of the modern corporation is the separation of ownership and control. Almost all medium and large businesses operate under this structure, called legal entity. The company is owned by shareholder who is principal, whereas managers as the agent are authorized to run the company on behalf of the shareholders.
The advantages of this structure are well acknowledged.
· It allows share ownership to change without interfering with the operation of the business.
·It allows the firm to hire professional managers.
·The company has limited liability which means shareholders do not hold personal responsibility for the firm's debt. However, it has also long been recognized that this separation of ownership from control results in potential conflicts between owners and managers.
1.3.2 Agency Conflict
INDUSTRY PRACTICE
The fight for Gome
Gome Electrical Appliances, starting as a small electronics store in 1987 in Beijing, was transformed into one of the largest home appliance retailer of China with more than 1000 stores nationwide and listed on HK Stock Exchange 13 years ago.
In 2008, much attention from media, academic and business sectors had been drawn to the battle between the firm's embattled founder, Huang Guangyu, and his successor as chairman of the board, Chen Xiao. After Huang's arrest for being charge of illegal business practices in November 2008, Chen and the board began making decision without the full consent of Huang and his family, including issuing HK $1.8 billion of convertible bonds to Bain Capital in June 2009, and a month later launching a stock option plan which awarded about 3% of Gome shares to more than 100 executives. Although all those moves were justified by Chen to be necessary to bail Gome out of financial difficulties and stabilize the management team under the harsh economic crisis, he received public censures for disloyalty and his motives were still being questioned. Chen claimed that the company should act on the best interest of the majority shareholders rather than serving one or two major shareholders.
On the other hand, Huang and his family would not allow his shares being diluted without striking back. In addition to purchasing shares so as to increase his holding from 35. 55% to 36. 1%, Huang was expected to raise trademark disputes over the use of the name“Gome”and the likely operation of the stores in the chain that were not included in the Hong Kong-listed company's portfolio, but were the assets of Huang's own private company. Surely, known as a ruthless competitor, Huang would do everything he could to hold his position in the board.
How to address the conflicts between major shareholders and minority shareholders, as well as the governance of family-controlled companies, how all parties pursuing their best interests within a frame of clear rules, this case highlights these important issues.
Source:retrieved from http://www.knowledgeatwharton.com.cn, adapted.
The shareholders elect the board of director, which appoints managers who then are supposed to act in the shareholder's best interests. The problem lies in the fact that the manager is able to act in his own selfish interest rather than pursuing the objectives of the principal.
For example, a company that operates in a mature industry where there are few growth opportunities may have surplus cash that cannot be invested profitable in its usual fields of operation. The company's shareholders would benefit if the surplus were paid to them as a dividend. But the managers may decide instead to use the cash to acquire another company that operates in a different industry. Other examples include managers working less energetically than they should, or diverting the company's resources to their own benefits, such as by acquiring luxury company cars, taking unnecessary business trips to exotic locations, and so on. In many cases, agency conflicts are not so intense to make headlines, though agency costs do incurred when management do not attempt to maximize firm value, and shareholders incur costs to monitor the managers and influence their actions.
1.3.3 Encouraging Achieving Company's Goal
公司治理是一套程序、惯例、政策、法律及机构，影响着如何带领、管理及控制公司。
Study shows that the agent（management）will make optimal decision only if appropriate incentives are given and only if the agents are monitored. We have to be aware that, either motivating or monitoring management, agency costs incurs anyway. Incentives include：
·performance-related pay, bonus, “perks”（such as company automobiles and expensive offices）；
·rewarding management with shares；
·share options.
Monitoring is done by using regulatory requirements such as corporate governance.
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation（such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders）and include the rules and procedures for making decisions in corporate affairs.
Contemporary discussions of corporate governance tend to refer to principles raised in three documents released since 1990:the Cadbury Report（UK,1992）,
the Principles of Corporate Governance（OECD,1999,2004 and 2015）, the Sarbanes-Oxley Act of 2002（US,2002）. The Cadbury and Organisation for Economic Co-operation and Development（OECD） reports present general principles around which businesses are expected to operate to assure proper governance. The Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the federal government in the United States to legislate several of the principles recommended in the Cadbury and OECD reports.
Good corporate governance involves risk management and internal control, accountability to stakeholders, and other shareholders and conducting business in an ethical and effective way. Corporate governance generally covers the fol-lowing area：
·nomination committee；
·independent non-executive directors；
·remuneration committee.
Topics Covered in This Book
We have mentioned how financial managers face making decisions in three major areas, advocate maximization of shareholders value as the goal of the firm. We also need to have basic knowledge about the environment where the business operate and how it would impact on managers' decision making. Next, we explore the fundamental concepts in financial management, time value of money, valuation and concepts of risk and return in part two. Part three focuses on project evaluation. Indeed, the foundation for maximizing shareholder wealth lies in valuation and in an understanding of the trade-offs between risk and return.
Part four is concerned with financing decisions; we will discuss how much the company should borrow and how much the company should pay out to its shareholder.
Part five covers short-term financial management, addressing that working capital should be managed efficiently.
Not only in domestic market, have financial managers played roles in international stage. In part six, we look at particular foreign currency risk and interest rate risk and exam various hedging methods.
Summary
This chapter has provided an overview of financial management. The key concepts covered are：
·Finance management decisions consist of investment decision, financing decision, dividend decision and risk management.
·The primary objective for the business is shareholders' wealth maximization. Shareholders wealth is represented by the market value of the firms' share.
·Agency theory suggests that manager may have different objectives from those of shareholder;agency conflict may arise as the consequence of separation of ownership and control in corporation.
·It is argued that management will only act in shareholder's best interest only if they are monitored and appropriate incentives are given.
·Incentives include Performance-related pay, bonus and share options; monitoring is done by using regulatory requirements, such as corporate governance.
Questions
1．The financial goal of a corporation is to（ ）.
A. Maximize profits
B. Maximize sales
C. Maximize the value of the firm for the shareholders
D. Maximize managers' benefits
2．Corporations, potentially, have infinite life because（ ）.
A. It is a legal entity
B. Of separation of ownership and management
C. It has limited liability
D. None of the above
3．Which of the following statement always apply to corporations?（ ）.
A. Unlimited liability
B. Limited life
C. Ownership can be transferred without affecting operations
D. Shares must be widely traded
4．Agency problem arises in corporation because（ ）.
A. Managers may not attempt to maximize the value of the firm to shareholders
B. Shareholders incur monitoring cost
C. Separation of ownership and management
D. All of the above
5．Which of the followings are stakeholder groups for a company?（ ）.
i. Employees; ii. Ordinary shareholders; iii. Suppliers; iv. The board of directors.
A. i and ii
B. i, ii, and iv
C. ii and iv
D. all of above
6．What are the major functions of financial manager? How are they related？
7．Contrast the objective of maximizing earnings with that of maximizing wealth.
8．If all companies had an objective of maximizing shareholder wealth, would people overall tend to be better or worse off？
9．As an investor, do you think that some managers are paid too much? Do their rewards come at your expense？
10．Assume that you are serving on the board of directors of a medium-size company and that you are responsible for establishing the remuneration scheme of senior management. You believe that the company's CEO is very talented, but your concern is that he is always looking for a better job and may want to boost the company's short-run performance（perhaps at the expense of long-run profitability）to make himself more marketable to other corporations. What effect would these concerns have on the remuneration scheme you put in place？