Posts Tagged ‘agency conflict’

Making Sense of Nonsense: Enhancing Corporate Governance Through Compliance

Friday, July 20th, 2012

by Peita Lin

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” — Adam Smith

While not the first to make such an assertion, much of modern capitalism works under the assumption that the inherent vices that drive human behaviour, namely self-interest and the inordinate accumulation of wealth are thought to be in aggregate beneficial for society. As a certain fictional investor once so eloquently remarked ‘greed, for a lack of better word, is good’.

We’re all utility maximisers and corporate executives, as the fittest specimens of this criterion, serve to remind the rest of us why we’re not making seven digit salaries. The greedy tendencies that drives and motivates their success are often at times to the detriment of others; and therein lies the fundamental problem underpinning much of corporate governance. We expect them, the executives and managers, to act ruthlessly in competition but fairly in the allocation of accrued benefits to us, the faceless shareholders. The technical term is ‘agency conflict’ and a great deal of time has been spent detailing and proposing solutions to this problem with varying degrees of success. A quick definition for the uninformed: the separation between ownership and control in an incorporated firm creates tensions between the interests of the principal and agent thereby creating a position of moral hazard.


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