Agency Cost:
Agency costs arise largely from principals monitoring activities of agents, and may be viewed in monetary terms, resources consumed or time taken in monitoring.
Residual Cost:
This is an additional type of agency cost and relates to directors furnishing themselves with expensive cars and planes etc. These costs are above and beyond the remuneration package.
Agency cost:
Agency costs arise largely from principals monitoring activities of agents, and may be viewed in monetary terms, resources consumed or time taken in monitoring. Costs are borne by the principal, but may be indirectly incurred as the agent spends time and resources on certain activities.
Residual loss:
This is an additional type of agency cost and relates to directors furnishing themselves with expensive cars and planes etc. These costs are above and beyond the remuneration package for the director, and are a direct loss to shareholders.
Agency problem resolution measures:
– Meetings between the directors and key institutional investors.
– Voting rights at the AGM in support of, or against, resolutions.
– Proposing resolutions for vote by shareholders at AGMs.
– Accepting takeovers.
– Divestment of shares is the ultimate threat.
Need for corporate governance:
-If the market mechanism and shareholder activities are not enough to monitor the company then some form of regulation is needed.
-There are a number of codes of conduct and recommendations issued by governments and stock exchanges. Although compliance is voluntary (in the sense it is not governed by law), the fear of damage to reputation arising from governance weaknesses and the threat of delisting from stock. Exchanges render it difficult not to comply.
– Incentive schemes and remuneration packages for directors
– Costs of management providing annual report data such as committee activity and risk management analysis, and cost of principal reviewing this data
– Cost of meetings with financial analysts and principal shareholders
– The cost of accepting higher risks than shareholders would like in the way in which the company operates
– Cost of monitoring behaviour, such as by establishing management audit procedures.
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