Agency Problem

Ideally the Management and the Board has a fiduciary responsibility of serving the best interest of the stockholders (Stakeholders). The promter and the management gets paid to increase the shareholder wealth. And shareholder reward them in return via salary and profit share. However its often seen that the realationship is far from ideal.

One of the biggest problem faced by today’s companies is not competition, sales, economic downturn… but Agency Problems. Often the shareholders are not proactive enough to demand transparency and question the action and the though behind the management’s decision. Sometimes the reward structure is skewed and complicated. As a result what is best for the company is not necessarily best of the individual.

The 2 most debated topic under this head are:
1. Satyam: Since the promoter holding was single digit, Promoter tried to mmaximize his personal gains at the cost of the company.

2. Stock Options: In the USA bulk of the management compensation is paid via stock options. This encourages a high risk taking behaviour almost equivalent to gambling. After all if the bets work out, the stock price zoom and these executives make a killing. If not, then the downside risk is low.