Corporate Finance: Stakeholder Objectives and Agency Problems

This report provides a comprehensive overview of corporate finance, focusing on the role of management in meeting stakeholder objectives, the main financial objectives of a financial manager, agency problems between management and shareholders, and ways to reduce agency theory conflicts. It examines the importance of stakeholders such as employees, government, shareholders, and customers, and how management ensures their objectives are met. The report also outlines the key financial objectives including financial planning, investment decisions, and raising funds. Furthermore, it explores the agency relationship, highlighting potential conflicts of interest and strategies to mitigate these issues through full transparency and other methods. The report emphasizes the significance of effective financial management and stakeholder engagement in achieving corporate success.

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Corporate Finance

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Table of Contents
Introduction................................................................................................................................3
Part B..........................................................................................................................................4
a) Role of management in meeting stakeholder objectives....................................................4
b) Main financial objectives of financial manager.................................................................7
B. agency problems between management and shareholders................................................8
C. Ways to reduce agency theory conflicts............................................................................9
Conclusion................................................................................................................................10
References................................................................................................................................11

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Introduction
Corporate finance is an important aspect which is required to be considered in the business
and in that there are various aspects which need to be considered. The management is
involved in all the processes and plays an important role in the same. All of this will be
discussed in the report and in that the role which management plays in fulfilling the
objectives of stakeholders will be taken into account. The financial manager is required to
perform various tasks and the major financial objectives which are focused by them will be
identified and reported in the report. In carrying various operations there are certain issues
that arise among the management and shareholders and they will be evaluated in an
appropriate manner. All the agency theory conflicts are required to be reduced and the
manner in which this will be made possible will be identified and discussed by which proper
understanding will be gained.

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Part B
a) Role of management in meeting stakeholder objectives
In the business, there are various stakeholders who are involved and it is required that
complete knowledge about them shall be gained. There are various objectives that are
involved in association with them and it is the responsibility of management to fulfill them in
the most appropriate manner (Adams. 2017). In the business, there is the relation of the agent
and principal who is involved and to deal with that in an effective manner there is the use of
agency theory. Under this, the relation which exists among both of them is considered and the
aspects of the same are taken into account. It is identified that all the agents perform various
operations on behalf of their principal and in that no personal interest is involved.
Stakeholders are various parties involved in business and they have some of the other
interests in the business. Due to their interest, they are involved in the business and affect all
the functioning. Some of the major stakeholders involve the government, customers,
shareholders, creditors, and employees (Infoworks, 2016). There are certain objectives for
which they come in association with the business and due to that management are required to
take the required action to fulfill them. Under the agency theory also it is considered that
objectives of agents are met and for that principal is the head who is responsible.
Employees are involved in the business and perform all the tasks which are necessary. The
work which is made by them is essential for the company as on that only the success of the
business is dependent. In return for their services, they expect the company to pay them with
the required salary and other benefits (Menassa and Baer, 2014). There are several objectives
that are involved for them and the main among them are job security, job satisfaction,
motivation, and remuneration. In this process management plays an essential role as that will
be the one satisfying the employees. In order to provide job security to the employees, there
will be a need for the management to make certain policies. In that there will be a contract
which is made under the agency theory and by that job security will be attained. They will be
providing them with the required facilities which will be making their work easier.
All of the requirements of the employees will be fulfilled and they will be provided with the
incentives on the work which is performed by them. This will motivate them and also job
satisfaction will be provided. The management will recognize the efforts made by someone

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and that will boost the morale of the employees and they will be performing the tasks in an
even better manner (Mitchell et al., 2016). There will be a timely increment in the
remuneration which is paid and that will be made on the basis of the performance and
contract that has been made. The management will be following the appropriate system for
all the actions which will be taken and that way the objectives of employees will be fulfilled.
Another stakeholder includes the government and that is also an important part of the
business. The management also plays an essential role in this as the main objective of the
government is to form regulations that are followed by all the entities in an effective manner.
It requires ensuring that all the legal regulations are followed in the required manner and in
that management proves to be of great help. Management is required to formulate the process
by which the provisions are complied with appropriately and there is regular monitoring
which is made (Minoja, 2012). The government requires that all the payments such as tax
shall be made on time and to ensure this management will be making the proper setup in
which payment will be made on time and that will be monitored on a timely basis. The
agency theory is also involved as the relationship of principal and agent is involved and there
is the return that is made available in some of the other forms.
Shareholders are also important stakeholders for the company as they are the ones who make
the investment in the company. They have an objective to earn returns in the form of
dividends or capital gains. In this, the management will be required to ensure that their
requirement is getting fulfilled on time. There will be need to maintain the value of the shares
in the market as then only the benefit will be gained by the shareholders. Management will be
required to maintain the profitability and in that there will be the focus that will be made so
that an adequate amount is kept for the purpose of dividends (Ramus and Vaccaro, 2017).
The proper evaluation and monitoring of all the processes will be made by which the
excessive cost will be reduced and thereby the earnings of the business will be rising. In this
manner, they will be helping in the attainment of the targets and objectives which are
involved with the shareholders.
Customers are the ones who will be availing of the facilities and products that are offered by
the company. They are the buyers of the company and their main objective is to get the
products and services as per the requirement and that too at the affordable prices. In this, the
management will be required to ensure that all the requirements and preferences of the
customers are met in an appropriate manner. Customers will want that they get the value for

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the money which is paid by them and in this, there will be various procedures which will be
set by the management which will ensure that there is the production of the best quality
products. There will be regular check which will be kept to ensure that customers are retained
with the help of complete satisfaction.
All of the discussion which is carried ensures that management plays an important role in the
attainment of the objective of all the stakeholders. In this, the agency theory has also been
covered as all of the processes involve the same and the relation which is maintained.

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b) Main financial objectives of financial manager
In the business, there are various financial tasks that are required to be performed and for
that, there is a need for the financial manager. They are hired and have various objectives that
are to be fulfilled by them in the company. The main three objectives of them are specified
below:
Financial planning: In order to manage the finances in an adequate manner there is the need
for the plan and a financial manager will be required to prepare the financial plan
(Opentextbc, 2020). In that, all of the incomes and expenses which will be incurred in a
particular period will be specified.
Investment decision: There are funds in the business which are required to be invested in an
appropriate manner. There will be an evaluation of all the securities and other options that are
available to make the investment and then the one which will be most suitable will be
selected. The one which will be yielding the highest return for the business will be
considered.
Raising funds: There are several operations that are to be performed and for that, there will be
a requirement of the funds. The manager is required to ensure that there is proper availability
of the funds and they will be required to be arranged (Harness. 2018). Various internal and
external sources of funds are available and it will be the duty of the financial manager to
evaluate them and select the one which will be most appropriate.
All of these objectives will have to be met by the manager so that proper and efficient
working of the company will be ensured and there will be no issues that will arise in
undertaking any project.

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B. agency problems between management and shareholders
In the agency relation, there is the act which is performed by the agent for the interest of the
principal and when the interest of both conflicts then the agency problem arises. There are
situations in which the conflict of interest arises between the management and shareholders
and in that case, the problem arises among them (Edgerton, 2012). In this relation, the
management acts as an agent of the shareholders and is required to perform in such a manner
that the shareholders of the company are benefitted. In the circumstances in which
management in place of the interest of the other thinks about its own interest then the
problems arise.
Shareholders are the real owners of the company but it is not possible for them to manage the
task and due to that they provide this responsibility to the management. They will be acting
on behalf of the shareholders and will work for their interests. Management will also be
acting for the wealth of the company and in that process, the wealth of shareholders might be
affected. This will be leading to the development of the agency problems as the management
will be using the information which is available with them for their benefits. There are
various other methods by which the problems may arise. The income which is earned by the
company is required to be delegated in an appropriate manner (Managementnote, 2020). In
some of the cases, the distribution of the income is not made in a sufficient amount to the
shareholders and distributed to other parties which will be beneficial for the business.
By this, the interest of the shareholders will be affected and they will be receiving fewer
amounts and that will not fulfill their aim to invest in the company. The relation of the agent
and principal will be affected and by that problems will arise.

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C. Ways to reduce agency theory conflicts
In the application of the agency theory, there are various conflicts that arise among the agent
and principal and it is required that they shall be dealt with in the most adequate manner.
There are various ways in which this can be made possible and it is required that all of those
steps shall be considered. The explanation of them is provided below by which proper
understanding will be gained and they will be used by the company so that positive changes
can be made possible (He, 2012). All the conflicts which are faced will be resolved with the
help of this and it will lead to a better relationship among all. The main methods are as
follows:
Full transparency: In the agent and principal relation there are various such cases in which the
information is not clear among both the parties. There is a disparity that is involved and due
to that various problems arise. If the agent is interested to make the personal gain then the can
exploit the principal in many ways due to the higher level of knowledge they possess in
comparison to another party. In order to eliminate the issues, it is required that there shall be
complete transparency which shall be maintained and by that all the gaps will be reduced.
The agent shall take the responsibility and make available all the information to the principal
by which they will also have an idea about all the actions which are being taken. This will
reduce the chances of misunderstanding and all the conflicts will also be resolved.
Commission and bonus structure: There are various financial incentives that are involved in
the agency relationship and in order to remove the conflict, all of them shall be eliminated. In
order to earn the commission and bonus, there are various circumstances in which agents
offer the wrong product or service to the principal. They try to maximize their share of gain
and in that interest of the principal is hampered (Quickbooks, 2020). There shall be fixed pay
which is decided and by that, the issues will not arise as the agent will not have any
additional scope to earn more and so the conflict of interest which arises in normal cases will
not take place.
Restriction on capabilities of agent: In some of the cases there are many powers that are given
to the agents and that also acts as the challenge for the business. In that situation, the agent
will have power and will think that they can take any decision. They will be overconfident
and will make the decisions that might not be beneficial for the other party. They will be

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corrupting the company and will not pay heed to the demands and requirements of the
principal for which they are kept originally. There will be need to keep the powers in limit
and only that much power will be given which is required to carry the tasks and operations in
the most effective and efficient manner. There will also be the introduction of proper
practices and monitoring process in which a continuous check will be kept on the actions
which are taken by the agents.
All of these ways will be used by the company and with the help of that all the conflicts
which arise in the agency relationship will be eliminated to a considerable level.
Conclusion
From the report that is presented above, it can be concluded that there is the agency theory
which is used in all the companies. There are various aspects in relation to this which are to
be taken into account. There are many stakeholders which are associated with the business
and all have some of the other objectives. Their interests have been identified in the report
and the manner in which management plays an important role in their achievement is
ascertained. The complete discussion is made and with that, the financial objectives which
are there in relation to the financial manager have been detected. The most common agency
problems which arise among the manager and shareholders have been identified in an
appropriate manner. It is required that the conflicts which arise among the agent ad principal
shall be resolved and all the ways by which this can be made possible have been taken into
consideration.

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References
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Available at: https://bizfluent.com/info-10028146-stakeholders-objectives-organization.html
[Accessed 8 March 2020]
Edgerton, J. (2012) Agency problems in public firms: Evidence from corporate jets in
leveraged buyouts. the Journal of Finance, 67(6), pp.2187-2213.
Harness. J, (2018) What Is the Goal of a Financial Manager Within a Corporation? [Online]
Available at: https://bizfluent.com/info-12096172-goal-financial-manager-within-
corporation.html [Accessed 8 March 2020]
He, W. (2012) Agency problems, product market competition and dividend policies in
Japan. Accounting & Finance, 52(3), pp.873-901.
Infoworks. (2016) Why Stakeholder Management is Important [Online] Available at:
https://infoworks.com/why-stakeholder-management-is-important/ [Accessed 8 March 2020]
Managementnote. (2020) Agency problem between shareholder and manager. [Online]
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Menassa, C.C. and Baer, B. (2014) A framework to assess the role of stakeholders in
sustainable building retrofit decisions. Sustainable Cities and Society, 10, pp.207-221.
Minoja, M. (2012) Stakeholder management theory, firm strategy, and
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Mitchell, R.K., Weaver, G.R., Agle, B.R., Bailey, A.D. and Carlson, J. (2016) Stakeholder
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https://opentextbc.ca/businessopenstax/chapter/the-role-of-finance-and-the-financial-
manager/ [Accessed 8 March 2020]

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Quickbooks. (2020) Conflict of Interest: Resolving the Agency Problem. [Online] Available
at: https://quickbooks.intuit.com/ca/resources/self-employed/conflict-of-interest-resolving-
agency-problem/ [Accessed 8 March 2020]
Ramus, T. and Vaccaro, A. (2017) Stakeholders matter: How social enterprises address
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