The document discusses agency problems that arise from the separation of ownership and control in corporations. It defines agency problems as managers potentially prioritizing their personal goals over corporate goals. It then outlines some ways that agency problems can be prevented, including through market forces like security market participants actively engaging in management and hostile takeovers, as well as through agency costs. Agency costs refer to the costs shareholders take on to try and ensure managers maximize shareholder wealth, such as through monitoring, bonding, and structuring manager compensation.

1. SEPARATION OF
OWNERSHIP & CONTROL :
“AGENCY COST”
PROBLEMS
By,
Abhishek Kumar
PGDM-IB
ROLL NO : 4

2. AGENCY PROBLEM
 Agency problem is the likelihood that managers may
place personal goals ahead of corporate goals.
 A characteristic feature of corporate enterprises is the
separation between ownership and management.
 Thus, with the objective of survival, management would
aim at satisfying instead of maximizing shareholder’s
wealth.

3. Prevention of Agency Problem
 The agency problem can be prevented by:
 Market Forces
 Agency Costs
Market Forces:
It is of two types:
 Behavior of security market participants
 Hostile Takeovers

4. Cont’d….
• Behavior of security market participants:
 The participants include institutional investors(mutual funds,
insurance etc.) actively participate in management. They use
their voting rights to replace more competent management.
• Hostile takeovers:
 It is the acquisition of the firm by another firm that is not
supported by management. The constant threat of takeover
motivate management to work for maximizing owner’s wealth.

5. AGENCY COST
 These are the costs borne by shareholders to prevent
agency problem as to maximize owners wealth. And
they are caused due to separation of ownership.
 They have to incur 4 types of costs:
 Monitoring
 Bonding
 Opportunity
 Structuring

6. Monitoring Expenditures and
Bonding Expenditures
 Monitoring the activities of the management to prevent
satisfying and maximising owner’ wealth.
 It relates to the payment for audit and control
procedures to ensure that management is working for
maximising owner’s wealth.
 Bonding protects the owners from the consequences of
dishonest acts by management/managers.
 They firm pays to obtain a fidelity bond from a third
party bonding company to compensate for financials
loses due to dishonest acts.

7. Opportunity cost and
Structuring expenditure
 Opportunity costs are those which results from the
inability of the firm to respond to new opportunities.
 Due to organisational structure, hierarchy etc. the
management faces difficulties in seizing profitable
investment opportunities.
 Structuring expenditure relates to structuring
managerial compensation to maximise owner’s wealth.

8. Cont’d…
 It is of two types:
1. Incentive Plans
2. Performance Plans
 Incentive Plans:
 They tie management compensation to sare price.
 The most widely used plan is stock options which
allows management to acquire shares at special
prices. Higher price will result in larger management
compensation.

9. Cont’d….
 Performance Plans:
 These plans compensate management on the basis of its
proven performances.
 Performance shares are given to management for
meeting the stated goals
 Another type, cash bonuses – cash payments are given
for achievement of the stated performance goals.

10. Thank you