The divorce/separation
of ownership and control helps explain the principal/agent problem.
Among large firms, the managers and the owners
of the company tend to be separate. One who has the financial capacity to
invest into a company (in extreme cases this can be through inheritance,
lottery..) can do so without running it. This is the separation of ownership
and control.
Because the owners are different to those who run the
company (the managers), they may have different objectives. Managers want to benefit from perks (e.g. company car
contribution, pension contribution, discounted gym membership) and bonuses. Owners want to maximise shareholder value. They also want
to satisfice: achieve minimum
targets that are acceptable and satisfactory to all member groups of the
coalition that make up the firm. Satisficing helps resolve the conflict bought
by the separation of ownership and control because in order to achieve ‘minimum’
targets, both parties must compromise. For more on satisficing, click here.
The principal-agent problem is the conflicting objectives
of the owners and the shareholders of the company.
How does the principal-agent problem affect a firm?
The owner can never be sure that the employed managers
are aiming to maximise profits or succumb
to the temptation of maximising their own benefits, possibly leading to
decreased profitability.
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