Small companies often look into ways they can improve and expand their performance. Also, they look into attaining and serving a broader market. As a result, it has led to the company’s advancement from a limited company to a corporation to enhance and affect its growth. Therefore, they can get revenue from their investors interested in purchasing their stocks and enhance their operations going forward. Besides, this means that they will be able to create different avenues of revenue apart from their textiles.
Agency Relationship and Costs
The agency relationship is a theory that describes the relationship between principals, the shareholders, and their agents, who are the company’s executives. This relationship exists to help solve problems between principals and agents (Kopp, 2021). Furthermore, the existing relationship allows the principals to make financial decisions, after which they delegate those roles to the agents to execute them, as the response directly affects the shareholders. Therefore, an agency relationship is influential for company shareholders to make financial decisions that are affected by the agent and, in turn, bring prosperity to the company.
On the other hand, agency cost is described as the internal expense that results for the principal when an agent acts on their behalf (Chen, 2021). More often, the agency cost occurs due to core inefficiencies, disruptions, and dissatisfaction between the shareholders and the management (Chen, 2021). The difference in interest between the management and its shareholders is what results in agency costs.
Managerial Behaviors Potentially Harming Firms Value
Different managers have different ways of carrying out their operations in organizations. As a result, some managers may exude destructive behaviors that can be intentional or unintentional and, in turn, would negatively affect the business. The first behavior includes over-investing in poor business in that the managers reject risky positive NPV projects to instead not identify with the projects when they fail. Instead, they engage in risky damaging NPV projects to become successful (Cengage Learning, 2020). Furthermore, they make excess investments in securities and acquisitions rather than providing investors with returning capital (Cengage Learning, 2020). Such behaviors limit the company’s capability to attain its full potential and success because the riskier a business venture is, the more profitable it is to the business.
Another opposing behavior managers present is avoiding difficult decisions, which translates to short-term thinking and asset management (Cengage Learning, 2020). Furthermore, they sometimes manipulate information releases and manage earnings to avoid delivering bad news to the stakeholders. This is terrible behavior because stakeholders need to understand what happens in the company and their input to enhance its performance.
Managers are known for micromanaging the business capital and other employees. This can be a negative behavior because managers tend to manage their subordinates. As a result, most employees need help to become effective and innovative when carrying out activities when they are in operations. Also, they tend to control the capital in a company setup.
If there is anything increasingly crazy in organizations is the numerous consumption of the benefits that sometimes are not deserved (Cengage Learning, 2020). Furthermore, they often stipulate rules and guidelines for compensation that each member of the organization needs to be given.
Mistaking goals for strategy is another harmful behavior presented to managers. As such, they spend too little time and effort in deciding if they are creating a goal or business strategy (Cengage Learning, 2020). As a result, this pauses danger to the company regarding investments that might be needed to ensure it grows to its ultimate capacity.
Corporate Governance
Corporate governance refers to the rules and guidelines that influence how a company operates and the decisions made by managers (Cengage Learning, 2020). Following the guidelines and rules are set within an organization to serve the interests of its people. Such provisions include board of directors, charter provisions affecting takeovers, capital structure choices, internal accounting control systems, and compensation plans (Cengage Learning, 2020). All these provisions are influential in ensuring all members working within an organization are taken care of in terms of interests.
External Factors that Improve Firms Corporate Governance and Value
Despite internal provisions playing a pivotal role in ensuring a corporate firm effectively carries out its operations. External factors are also responsible for improving a firm’s corporate governance and value. Such factors include; economic, political, technological, and competitive factors. Such factors greatly influence a company’s performance because, in a way, they get to compare their performance with others and further improve their performance.
Characteristics of Board of Directors
The board of directors is a central and vital part of an organization, and they are guided by principles that determine their characteristics. Such characteristics include; the CEO is not the board’s chairman and having little control over the nominating committee. Secondly, they have an elective mechanism that allows minority shareholders to gain seats. Thirdly, most of the board directors are from the outside and do not have a position in the company but possess business expertise. Fourthly, the compensation for the board members is appropriate, with most compensations being low. Finally, the board of members needs to be interlocking (Cengage Learning, 2020). These characteristics enable the company boards to deliver on their roles effectively.
Defining Terms
Greenmail
Companies use the greenmail method as a defensive method against a hostile takeover. Therefore, greenmail is defined as the practice by businesses to buy enough shares in a company to threaten a hostile takeover (Hayes, 2022). This payment is made particularly during mergers and acquisitions.
Poison pills
The poison pill is a defensive strategy used by company directors from the public sector to prevent active investors, acquirers, or competitors from taking control of the company by buying large amounts of stocks (Hayes, 2022). It is intended to block stock accumulation beyond the set percentage of the company’s outstanding shares by distributing additional discounted shares to all shareholders later.
Restricted voting rights
In some companies, the employees are company owners in that they own several stocks. Furthermore, since the board of directors manages the companies, shareholders have no right to vote on the daily operations (Hayes, 2021). As a result, they can vote for decisions in companies. However, they have limits to which they can vote on issues facing companies.
Use of Stock Options
Companies use stock options to give their employees a share directly in the company’s success through holding stocks. Also, they provide a tangible representation of what their employees are worth. Besides employees, the stock options are helpful to the company by ensuring the company incentivizes employees to help the company grow and can also be an exit strategy for owners in extreme circumstances (Picardo, 2022). Stock options are essential for employees and the company by giving them an advantage in ownership and creating revenue.
Problems of Using Stock Options as Compensation
Although stock options are a very productive means of compensation for the company and the employees, they also cause problems. Such problems arise from the management whereby options encourage managers to give false financial statements or take risks beyond the company. Also, managers can underperform as they still reap the same benefits provided the stock price increases above exercise cost (Cengage Learning, 2020). Stock options can be misused to benefit a few people within a company.
References
Cengage Learning (2020). Chapter 13: Corporate Governance.
Chen, J. (2021, March 28). What are Agency Costs? Included Fees and Example. Investopedia. https://www.investopedia.com/terms/a/agencycosts.asp
Hayes, A. (2021). What are Stockholder Voting Rights, and Who Gets a Vote? Investopedia. https://www.investopedia.com/terms/v/votingright.asp
Hayes, A. (2022, April 29). Greenmail: Definition, How it Works, Example, Legality. Investopedia. https://www.investopedia.com/terms/g/greenmail.asp
Hayes, A. (2022, October 23). Poison Pill: A Defense Strategy and Shareholder Rights Plan. Investopedia. https://www.investopedia.com/terms/p/poisonpill.asp
Kopp, C. (2021, September 4). Agency Theory: Definitions, Examples of Relationships, and Disputes. Investopedia. https://www.investopedia.com/terms/a/agencytheory.asp
Picardo, E. (2022). Employees Stock Options (ESOs): A Complete Guide. Investopedia. https://www.investopedia.com/terms/e/eso.asp
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