Agency Conflicts Galore
Till this point we have assumed that the managers only work for the good of the firm and try to enhance its good image. But is it really so? In the real world, very few people work selflessly for the sole benefit of the company. In real world, most people are self centered and only work for their self interest, so does the managers. What it does, it causes conflict between the agency members. In this chapter we are going to deal with these conflicts between the people responsible for the operation of the company and the investors.
According to theory, the revenue generated should first be used for debt clearance, then the equity and finally the managers would be paid according to their contribution in developing the company’s value. Remember, all these are in theory. Did you ever wonder, why is money returned to investors? Can’t the managers just ignore the investors once the company has their money? This is because shareholders are the ones who owns or controls the company. They have great influence over the working of the company. But these are mostly true in case of large shareholders. Then why is money allowed to return to small shareholders too?
The questions that we came up with, belongs to the section of corporate governance. It deals with resolving the conflict between those who responsible for the working and those supply the capital for working.
According to the words of James Madison, we would need no government if men were angels and angels were allowed to rule over us. The need to form governments for resolving internal and external conflicts requires enabling a group of men ruling over another. There lies the main problem.
You need to understand one thing, that is, corporate governance doesn’t mean good management. What it implies is that if the management tends to become bad, it has the power to discipline the management. It won’t be required to perform if the management is capable of avoiding conflicts. But it is necessary to understand that having a good management comes at its cost. What most managers fail to point out is that good governance or tougher governance comes at a cost. What they generally speak out publicly is that tougher governance isn’t required. This is where men consider themselves to be angels, as though they can’t make any mistake. They tend to argue that the presence of tougher governance can harm their integrity of work.