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Agency Problem for Various Stakeholders

There are various stakeholders in an organization. The two key stakeholders are the customers and the stockholders. Some financial managers believe that the customer is always right and an organization must do everything possible to win customer delight, thereby gaining a high market share and, subsequently, investor confidence. Conversely, some financial managers believe that a stockholder is more important than a customer because investors have many stock options available to them. Some organizations are better at attracting investors' capital.
With this framework in mind, what, according to you, should be the objective of an organization that is particularly good at attracting investors' capital? How can a financial manager increase the chances of meeting this objective?

The separation of ownership and control is often a subject of concern for financial managers. Management decisions are sometimes not acceptable to shareholders. This, in turn, raises conflicts. These conflicts are called agency problems.
For example, a chief executive officer (CEO) may spend a considerable amount of the organization's capital on artwork to decorate the office premises. The shareholders may raise the concern that their investment has been inappropriately invested as decorating the office premises will not yield any financial benefits.

Provide at least two more examples of agency problems. Why does such a conflict develop? Are such conflicts more likely to occur in smaller or larger organizations? Why? What can be done to decrease the likelihood of these conflicts?

Solution Preview

An organization that is good at attracting investor's capital is good at increasing stock value, increasing the overall wealth of the company, and increasing the value of the company. Investor's capital is attracted by organizations that show attractive short term profit, attractive long term profit, and minimize the risk of investment. If an organization has the objective of increasing shareholder wealth and maximizing company value it will be successful in attracting investor's capital.

The financial manager can increase the chances of meeting these objectives by increasing market share and maintaining profitability. Delighting the customer and maintaining profitability should be the objective ...

Solution Summary

Problems of attracting investors and conflict of interest between managers and shareholders is explained in a structured manner in this response. The answer includes references used.