Stakeholders objectives, agency problem & goal congruence
In this section, we are looking at the stakeholder’s objectives & how agency problems could arise in the long term. Also, we will discuss how goal congruence will dilute the effect of the agency problem. Therefore as a finance manager, you need to have a balance between these two technical aspects.
What is a stakeholder in business ?
Stakeholders are people and organizations that have an interest in the strategy of an organization. Stakeholders typically include shareholders, customers, staff, and the local community.
Stakeholder mapping
As a finance professional, you should understand the types of stakeholders in your company. In addition, it is vital to understand the behavior of your stakeholders in day to day business. Following chart shows the main three categories of stakeholders.
Above all ,various stakeholder groups in a company will have different objectives depend in part on the status of the organization. For instance , Shareholders – Providers of risk capital, aim to maximize wealth . Employees – Maximize rewards paid to them in wages and benefits, also prefer continued employment.
The agency problem
Agency theory is the hypothesis that examines the relationship between the organizational behavior of elements through an understanding of the relationship between Principal (as shareholders) and agents (Managers).The agency relationship sometimes elaborates on the relationship between management and shareholders.
A conflict may exist between actions carried out by agents in accordance with its interests those required to promote the interests of shareholders ( Principals)
The agency relationship resulting from the separation of the ownership from management is sometimes characterized as the agency problem. For example, if managers not take or very little of the company’s capital shares for which they work, what is to prevent them: Not caring about profitable investments ? Work inefficiently ?
Above all, principals ( Shareholders) have the power to remove any director from the company.
Goal congruence
In a control system, goal congruence is the state that leads individuals or groups to take actions that are in their own interest and the best interest of the entity.
Goal congruence can best be achieved, and the ‘agency problem‘ treated better, providing incentives to managers that are related to profit or share price. For instance, Performance-related pay, share options.
