Principal-Agent Problems Are Caused by Insufficient Oversight by Company Directors free essay sample

Some theories try to put in place â€Å"the best way† to solve all the problems that present to the organizations. These studies suggest to us the following question. Do different interests from the operators cause the organizational issues? Through the expertise of the governance theories we will discuss the issue that exists between the owners and the managers of companies (Principal-Agent). This case study deals about the recent outrage that happened this summer about different cheatings in the Australian sports field. As part of this, Essendon players used banned substances to enhance their performance. This problem was quickly linked, by the experts, to the lack of governance and rapidly became the center of attention. The principal-Agent issues are caused by insufficient oversight by company directors: Lack of control. Discussing this point comes to define the obvious. What is the directors’ control? Do the managers need to have their own liberty? All these questions show how important are the definitions of the relationship between the Principal and the agent. We will write a custom essay sample on Principal-Agent Problems Are Caused by Insufficient Oversight by Company Directors or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The shareholders and the agents. The agency theory discusses this point. Regarding to the work of Jensen and Meckling (1976), â€Å" the agency theory identifies the agency relationship where one part (the principal) delegates work to another part (the agent). † Some issues are related to this self-control theory. In fact, the agents are considered as individuals looking after their self-interest, and not the interest of the company. The Essendon scandal is a good example that shows how the managers can look after their own interest. So the winning at any cost policy became the watchwords. Indeed, The rapidly growing area of sports science was apparently a secret for the boards; even the biggest names in corporate governance that recently joined the Australian sports governance had no idea about these practices. For these reasons it seems normal that the relationship between the board and the managers is connected by contracts. This issue shows how important is the definition of the responsibilities for the agents. The outrage is considered as a lack of leadership and firm governance regulation. If the team had a clear policy against banned supplements there will be certainly not cheatings by taking drugs. Indeed, some players did not do it on purpose. If we consider their situation, we will realize that the drugs offered a simple resolution to their dilemma between enhancing performance and overstep the law. Recently, the Australian sport became very popular and attracts huge amounts of money. The club managers are running for the winning in a big rivalry. Thus, taking enhancing performance supplements shows how important it is for the board to keep a close oversight on the important matters, put on monitoring systems and stay informed. As Smith said: ‘the directors of such companies however being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious as if it were their own’. ‘Business of business is business’: the agent serves only the principal’s interests. On the other hand, there is another theory that supports that the agents serve, and well, the principal’s interests: the stewardship theory. Thus, the manager has to maximize the owners’ interests rather than the other actors of the company. Milton Friedman has presented the efficiency perspective of social responsibility. According to him, the business of business is business. In other words, a manager’s responsibility is to maximize profits for the owners of the business. From Friedman’s perspective, managers have no obligation to act on behalf of society if it does not maximize value for the shareholders. For example, one of the issues in the AFL Teams governance is to keep good coaches even if they are not popular or to only focus on the winning. From the efficiency perspective, it is impossible for managers to maximize shareholders’ wealth and simultaneously attempts to fulfill all of society’s need. In most large organizations today, the manager is not the owner. Managers serve as the agents of the organization’s owner (shareholders). Considering this point, we can easily accept that good coaches consideration depend on their popularity (winning average) for the supporters; which grow the benefits for the shareholders. Thus, rather than maintaining a close monitoring of the managers, the stewardship theory give another solution that seems to give more liberty to the agents. By creating a third board independent chair of the CEO to bind between the agent and the principal interests. It will set clear the company expectations. The team for example will look after a best solution to enhance the players’ performance without resorting to doping. The ultimate aim of the company is to maximize the interests of all the members. The Essendon scandal showed that the agents had to make cutbacks in several areas as marketing, administration, finance†¦ to payoff enhance performance scientists huge amounts. As a result, the team had balanced efficiency issues. Did the leaders stay silent or were not skilled to anticipate this issue and its consequences? In summary, the principal can try to rectify the lack of oversight by different means. They can put in place monitoring and surveillance means to keep informed about the agents’ practices. Furthermore, considering immeasurable results. Set up an encouragement system: rewards (bonus, stock, options ) and punishments. But this solution seems to takeout the agents’ liberty and damage the principal-agent relationship. Also, they can involve independent board to stay on the CEO, hich will have as mission to bind the interests of all the actors involved in the company rather than try to keep an oversight of the company businesses. Reference: Corporate Governance, Christine A. Mallin, Jensen and Meckling (1976), Editorial. (2013, Feb 9-10). Sport and the need for governance. Australian Financial Review: Weekend Edition (Sydney), p. 58. Stensholt, J. (2013, Feb 9-10). The sinister sid e of sports science. Australian Financial Review: Weekend Edition (Sydney), p. 20. Nickless, R. (2012, Feb 13). Learn from the AFL scandal. Australian Financial Review (Sydney), p. 1. Smith, P. (2013, Feb 9-10). Its the officials, and not the athletes, who deserve our scorn. Weekend Australian (Sydney), Sport, p. 35. Paterson, J. (2010). AFL club membership: A glorified stadium entry ticket, or a genuine ownership stake in the club? Company and Securities Law Journal, 28, 507-536. http://www. heraldsun. com. au/afl/more-news/drugs-scandal-takes-huge-toll-on-essendon-chairman-david-evans-as-it-is-suggested-he-has-lost-eight-or-nine-kilos/story-e6frf9jf-1226578281236 http://theconversation. com/essendon-scandal-a-symptom-of-australias-sporting-woes-12085