relationship between: AN EMPLOYEE AND A SUPERVISOR or AN AGENT AND A PRINCIPAL

The: MERGING or SEPARATION

management and the: USURPING or DELEGATION

real costs called: CONFLICT RESOLUTION or AGENCY

1. Agency conflicts and costs The nature and effects of agency conflicts Agency conflicts are a special example of a conflict of interest; specifically, they are created by the relationship between , and result from inconsistencies or disputes between the Interests and motivations of the different parties. The magnitude of these conflicts may be made larger or smaller by the environment in which they occur and the wallability of techniques or events to prevent, reduce, or rectly them. Left untaddressed, these conflicts can produce significant real and opportunity costs that the firm's shareholders and other stakeholders must bear. Examples of management behaviors that are not in the best interests of the firm's shareholders Indude shiriting, an excessive consumption of perquisites, an excitive concern with job security, reduced or excessive risk taking, and/or undertaking activities that are principally intended to expand or enhance a manager's ego, prestige, or power, For example, in business managed by professional managers, managers frequently have less financial and emotional commitment to the business than the firm's owners (the firm's common shareholders). The of ownership and management and the of decision making by the owners to the professional managers create an environment in which these condicts can take root. To prevent, reduce, or correct the conflicts between their managers and themselves, shareholders often have to incur additional real counts called costs In general, there are four categories of real or opportunity costs incurred by shareholders designed to prevent, mitigate, or correct management- shareholder agency conflicts. They are 1. Expenditures to minimire management's desire to act contrary to the best interests of shareholder 2. Expenditures to monitor management's activities 3. Expenditures to provide a bond against management dishonesty 4. The opportunity cost of lout profits Corder the following situation and Identify both the category of the expenditure and the best device that might be used to prevent, reduce, or correct the agency conflict: A firm's plant manager is afraid that her facility may be closed and her job outsourced to a lower-cost country. To make hersell look good, she sets lower than-appropriate performance gon's Expenditure Category: 01 O2 0.4 Most appropriate form of control devices Mire an external consultant to address the psychological concerns of the plant managers, Develop a management evaluation and compensation program that puts the burden on the management team to reduce shirking or excessive concern about job security Develop a code of ethics that prohibits shirking