Financial Management Case Study: Agency Relationship and Governance

This case study delves into the complexities of agency relationships and corporate governance within a financial management context. It begins by defining agency relationships, emphasizing the trust and legal authority between agents and principals. The analysis explores the absence of agency conflict in a scenario involving a single employee initiating a business with their own capital, while also acknowledging potential conflicts with customers. The study then examines the occurrence and mitigation of agency costs, particularly bonding and monitoring costs, when external lenders are involved. Furthermore, it defines corporate governance as the framework of rules and processes that manage and monitor organizations, balancing the interests of stakeholders. The case study identifies five corporate-governed organizations and discusses the use of stock options as a compensation tool, addressing the associated problems and limitations. Finally, it explores the influence of legal systems and regulatory agencies on corporate governance, emphasizing their role in maintaining healthy relationships and controlling company operations. References to academic sources support the analysis.

Running head: FINANCIAL MANAGEMENT
CASE STUDY FOR GIVEN SCENARIO
[Enter Name of the Student:]
[Enter Name of the University:]
[Author Note:]

1AGENCY RELATIONSHIP AND CORPORATE GOVERNANCE
Definition of agency relationship?
The bond associated between the agency and the client or any other agency are mainly
dependent upon the trust and confidence between the two. The principal in the business gives
legal authority to the person to work on behalf of the higher authority and negotiate business
with a third party organization (Enfield, 2013). The agent needs to understand all the roles and
responsibilities of the principal in order to work for the principal. The agency relationship plays
an important role in future strategies, objectives and plan execution.
Any case of agency conflict if only one employee is there and the money
invested is of the employee, during the beginning of operations -
From the given case scenario, the business is to be started initially in the student board of
the university and being the only employee it is quite tough to enhance the business. Agency
conflict occurs whenever one party is acting in benefit to another party. In this scenario, agency
conflict is not expected to occur as because only one employee will engage in the business with
the employees own capital and therefore there exist no case of conflict between the agent and the
principal (Lei, Lin & Wei, 2013). But conflicts with the customers might occur which will be
directly handled by the employee himself.
Occurrence of agency costs when fund raised from external lenders -
Agency costs occur when a dispute occurs between an agent and the principal and due to
that internal costs are incurred. If an agent wants to work with the sole aim of raising someone’s
wealth or power and not the shareholders’ value, agent cost are raised. There are three types of
agent cost and in this given scenario, bonding and monitoring costs might arise.

2AGENCY RELATIONSHIP AND CORPORATE GOVERNANCE
Mitigation of the agency costs by lenders -
In case of mitigating the agency costs, money lenders might reduce the monitoring of the
lenders as the single employee does not need continuous monitoring and thus the agency cost can
be reduced. The reduction of agency costs can be highly beneficial for the employee as well as
the money lenders as because it might result in better profit percentage.
Definition of corporate governance -
The term may be described as the set of regulations, process and rules by which a
company or an organization can be managed and monitored. The interests of the organizations
financers and suppliers along with the community are balanced (Tricker & Tricker, 2015). The
corporate behavior is set by many policies, rules and controls in an organization. However most
of the organizations lacks the use of high level of corporate governance. A clear corporate
governance can create direct set of rules for every level of managers and employees in an
organization.
The corporate governed company’s as asked -
The five corporate governed organization which are internal to a firm can be listed as
below –
British American Tobacco Plc.
Unilever Plc.
Diagoe Plc.
Sage group Plc.

3AGENCY RELATIONSHIP AND CORPORATE GOVERNANCE
Next Plc.
The use of stock in the purpose of compensation -
The stock option is the right given to any individual by the company itself to buy the
shares of that company for a certain amount of time (Cadman, Rusticus & Sunder, 2013). In a
plan to compensate, the stock options are often inserted in order to reward and motivate the
employees. The only concern is that whether the stocks will be valid even if the employee is not
any more associated with the company.
Problems of stock option as a part of the compensation plan -
One of the main problems with this system is that not always enough number of stocks
are available to satisfy the employees (Carpenter & Yermack, 2013). The employees are not
always good or responsible investors and as a result they might sometimes be offered stocks
which may decline in value later. The act of offering the stocks to the employees as a
compensation might sometimes result in issues with the company’s future planning efforts.
Role of legal systems and regulatory agencies affecting corporate governance -
The laws and regulatory in a corporate governance is mainly applicable for the various
managers, directors, shareholders and creditors. The corporate governance laws sometimes
include relationship among various businessman, people who have company shares and the
stakeholders. Any regulatory body in an organization helps the supervisors in controlling,
managing and governing the company and also helps in maintaining a healthy relationship with
the customer and the employees. Thus the regulatory agencies and the legal systems affects the
corporate governance.

4AGENCY RELATIONSHIP AND CORPORATE GOVERNANCE
References
Cadman, B. D., Rusticus, T. O., & Sunder, J. (2013). Stock option grant vesting terms: Economic
and financial reporting determinants. Review of Accounting Studies, 18(4), 1159-1190.
Carpenter, J., & Yermack, D. (Eds.). (2013). Executive compensation and shareholder value:
theory and evidence(Vol. 4). Springer Science & Business Media.
Enfield, N. J. (2013). Relationship thinking: Agency, enchrony, and human sociality. Oxford
University Press.
Lei, Q., Lin, B., & Wei, M. (2013). Types of agency cost, corporate governance and
liquidity. Journal of Accounting and Public Policy, 32(3), 147-172.
McCahery, J. A., Sautner, Z., & Starks, L. T. (2016). Behind the scenes: The corporate
governance preferences of institutional investors. The Journal of Finance, 71(6), 2905-
2932.
Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and
practices. Oxford University Press, USA.