What Are Agency Costs?

An agency cost is a type of internal company expense, which comes from the actions of an agent acting on behalf of a 澳洲幸运5开奖号码历史查询:principal. Agency costs typically arise in the wake of core inefficiencies, dissatisfactions, and disruptions, such as 澳洲幸运5开奖号码历史查询:conflicts of interest between shareholders and manageme🌜nt. 🔴The payment of the agency cost is to the acting agent.

Understanding Agency Cost

Agency costs can occur when the interests of the executive management of a corporation conflict with its shareholders. Shareholders may want management to run the company in a certain manner, which increases 澳洲幸运5开奖号码历史查询:shareholder value.

Conversely, the management may look to grow the company in ot🐲her ways, which may conceivably run counter to th🍒e shareholders’ best interests. As a result, the shareholders would experience agency costs.

As early as 1932, American economists Gardiner Coit Means and Adolf Augustus Berle discussed corporate governance in terms of🐽 an “agenꦅt” and a “principal,” in applying these principals ♓towards th𒊎e development of large corporations, where the interests of the directors and managers differed from those of owners.

Principal-Agent Relationship

The opposing party dynamic is called the 澳洲幸运5开奖号码历史查询:principal-agent relationship, which primarily r🌳efers to the relationships betwജeen shareholders and management personnel. In this scenario, the shareholders are principals, and the management operatives act as agents.

However, the 澳洲幸运5开奖号码历史查询:principal-agent relationship may also refer to other pairs of connected parties with similar power characteristics. For example, the relationship between politicians (the agents), and the voters (the principals) can result in agency costs. If the politicians promise to take certain legislative actions while running for election and once elected, don't fulfill those promises, the voters experience agency costs. In an extension of the principal-agent dynamic known as the "multiple principal problemღs" describes a scenario where a person acts on behalf of a group of other individuals.

A Closer Look at Agency Costs

Agency costs include any fees associated with managing the 澳洲幸运5开奖号码历史查询:needs of conflicting parties, in the process of evaluating and resolving disputes. This cost is also known as agency risk. Agency costs are necessary expenses𒈔 within any organization where the principals do not yield complete autonomous power.

Due to their failure to operate in a way that benefits the agents working underneath them, it can ultimately negatively impact their profitability. These costs also refer to economic incentives such as 澳洲幸运5开奖号码历史查询:performance bonuses, stock options, and other carrots, which would stimulate agents to execute their duties prop💞erly♏. The agent's purpose is to help a company thrive, thereby aligning the interests of all stakeholders.

Dissatisfied Shareholders

Shareholders who disagree with the direction management takes, may be less inclined to hold on to the company’s stock over the long term. Also, if a specific action triggers enough shareholders to sell their shares, a mass sell-off could happen, resulting in a decline in the stock price. As a result, companies have a financial interest in benefitting shareholders and improving the company's financial position, as failing to do so could result in stock prices dropping.

Additionally, a significant purge of shares could potentially spook potential new investors from taking positions, thus causing a chain reaction, which could depressꦐ stock prices even further.

In cases where the shareholders෴ become particularly distressed with the actions of a company’s top brass, aꩵn attempt to elect different members to the board of directors may occur. The ouster of the existing management can happen if shareholders vote to appoint new members to the board. Not only can this jarring action result in significant financial costs, but it can also result in the expenditure of time and mental resources.

Such upheavals also cause unpleasant and exorbitant red-tape problems, in𝄹herent in top-chain recalibration of power.

Real-World Example of Agency Costs

Some of the most notorious examples of agency risks come during financial scandals, such as the 澳洲幸运5开奖号码历史查询:Enron debacle in 2001. As reported in this , the company's board of directors and senior officers sold off their stock shares at higher prices, due to fraudulent accounting information, which artificially inflated the stock’s va😼lue. As a result, shareholders lost significant money, when Enron share price consequently nosedived.

Broken down to its simplest terms, according to the the Enron debacle happe♑ned because of "individual and collective greed born in an atmosphere of market eup♔horia and corporate arrogance."