Corporate Agency Cost, Challenges and Solutions

By Paul Jibateh;Policy, Strategy & Brands Consultant.

Principal

Jibateh Consulting

(WhatsApp +23276717854)

The corporate world is fraught with very interesting and life-changing experiences which more often than not awesbusiness owners, entrepreneurs and more so non-business and non-finance players who might not have accessed the nitty-gritty of the dynamics which lay in humongous doses in private and public companies in Sierra Leone, Africa, and the world at large.

Companies have in years past, now and will in future face the concern of the agency factor – which revolves around operational cost for companies in the short, medium and long term; the challenges which such pose, especially in terms of profit realisation and maximisation; and how smart companies have held the forte, performed and thrived all through the tough times, to become that (house-hold brands) which they are today.

Chen (2020) thought that what has been considered or called the agency problem has been but a mere ‘‘conflict of interest’’, as what has obtained in the corporate world is that one party (the principal) and the other (the agent) expects each other to act, in utmost good faith, in each other’s interest. More often than not that has not been the case – whether in Sierra Leone, Africa or globally.

This is mostly seen in corporations, where we have a system of operation that distinguishes the owners of the company from those who are responsible for the day-to-day administration of the company. In the corporate world, the challenges of agency arise when operation conflicts exist between the company’s management and its shareholders (Chen, 2020).

This means that those who handle the daily operations and administration of the firm are expected to maximise profit for the shareholders instead of for themselves – even though the Lead Agent i.e. the Chief Executive Officer and his/her team are more often than not rewarded greatly with bounteous salaries and other exotic incentives year on year.

The Early Economics of Corporate Agency

In the early years, corporate agency analysis were focused on several industries i.e. finance, economics, law, tourism, media, state governance etc. Murphy (2019) states that in the 19^th century more economists began to ask questions around why certain companies produce what they did, and he also looked into what inspired the choices of these firms on strategic matters like the allocation of firm resources and recruitment of core personnel.

In what was referred to as the ‘‘The Theory of the Firm’’, scholars who promulgated this theory thought that companies existed for one reason only, which was to trade their product and or services, and make humongous profit which the principal and agent share – the latter receive theirs in the form of dividend and the former in remuneration and other forms of incentives.

Apart from maximising profit, it was also important for firms to consider ‘‘public perception, social responsibility, and long-term investment in the company’s viability’’ (Murphy, 2019). At some point in the development of the same, the customer factor came in i.e. feedback made companies realised that customers expected to get satisfaction for their money’s worth. For instance, when a consumer patronise a company by either purchasing a product or using it services for a particular amount, say $100; s/he would expect an equal or significantly proportionate or exceeding satisfaction from the consumption and or use of such products and or services.

Corporate Agency Challenges

It is very difficult for humans to co-exist in either a domestic or corporate setting without conflict. In both settings, the issues are similar but manifest in different ways. For instance, such a challenge in the corporate setting would lie in giving administrators the necessary encouragement to work in the owner’s interest, as opposed to simply working for or in only promoting their own (Amour et al, 2009).

Amour et al (2009) also spoke specifically to the three problems companies encounter in this regard. They are as follows:

1. Owner and Manager Relationship: The challenge here comes out in an obvious manner in companies, especially big ones. The interest of the owners and those they have put in charge of the day-to-day operations of the company come into vicious conflicts – especially in matters of vital decision making which more often than not would determine the future of the company. One example can be whether or not the company should make new acquisitions i.e. to buy another company which the owners may consider wise as it would increase the value of the company’s share and also broaden its market share. The management on the other hand may think it is too risky to take such action, as such action might blot the company’s operations cost and add more layers to its bureaucracy, which most senior executives might consider disadvantageous to them.
2. Owner vs. Owner Relationship: This level of conflict is where the shareholders reside. And amongst them, we have majority and minority shareholders. The former are with controlling shares and most often than not that goes with veto powers on decisions of the company, which do not go down well with individuals in the latter category. This situation breeds conflict in the company, and if not handled maturely it can lead to such companies even winding up.
3. Controlling Interests: In corporation settings, there are often the dormant, ordinary and preferential shareholders. The tussle for power and control of decisions in the operation of the company usual inspires conflict amongst these set of players within the corporation. When matters arising on this front are not handled with caution and or with maturity, certain companies end up breaking-up, as progress is more often than not stalled.

Corporate Agency Solutions

It is in matters of fiduciary responsibility i.e. situations in which one party is expected to work and or act in another’s best interest, which more often than not give rise to conflict, especially the corporate agency kind. Chen (2020) states that ‘‘relationships such as between trustees and beneficiaries, board members and shareholders, and lawyers and their clients’’ can fall safely into this category. I agree with this, and would dare to add the relationship which exist between governments (The Executive, Legislature and Judiciary) and the populace and or electorates they represent.

The solutions to the challenges mentioned above can indeed be managed, and it is my thinking that with the right policy and institutional framework in place, that can be achieved in a succinct manner. And Ross (2019) agrees with me in that he observed that the challenges in corporation and multinational companies as regards agency can be solved by putting in place the appropriate incentives and contract design, for the effective and efficient management of those entities.

Below are some of the precise actions I would implore companies to take to mitigate their corporate agency challenges:

1. Companies should offer employees the right remuneration and incentives: Every individual employee has his/her respective dream, vision and plans to grow professionally and otherwise, so offering them the right incentives and conditions of service will enable them achieve those dreams and still remain loyal to the company they work with. For example, certain incentives should be given to employees who double or triple sales quota for either the quarter or the year, as the case may be. Companies can also put a human face to things by giving pregnant and or lactating mothers time-off or the preference of working from home, so that they can be effective with work and attend to other equally important areas of their lives.
2. Companies should adopt standard principal-agent models: This will ensure that there will be clear division of labour specifications, and the expectations from both parties i.e. the owners or shareholders and the managers or employees. When this is the case, one would realise that operations cost in this regard will be managed effectively, and the rivalry and infightings that is noticed in certain companies will not be seen in a company which takes this step. Even if situations of tension arise, because there is a system in place, the parties involved will address the issues raised in a mature and professional manner.
3. Companies should make effective regulation a part of their administration and operations: When fiduciary relationship exists, it is expected that contracts, agreements and other legal instruments which create and oversee such relationships should be the same tool that would be used to regulate those existing relationships. There should be the incorporation of standard clauses in the documents which create such relationships, to check any excesses from either parties, and also ensure that the parties involve understand the role they should play, at any particular point in time.

Conclusion

The creation and structuring of companies is a process which requires conscious efforts in putting the appropriate corporate agency model in place which would foresee the healthy operation of the company. This ensures that the right checks and balances are in place for the principal-agent relationship to set sail in a smooth, mature and professional manner which would be beneficial to all, and offer a win-win solution whenever conflicts arise.

References

Amour, J., Hansmann, H., Kraakman, R., (2009) Agency Problems, Legal Strategies and Enforcement. John M. Olim Center for Law, Economics, and Business – Harverd Law School.

Chen, J. (2020) Agency Problem. Accessed on 10^th August, 2020 via https://www.investopedia.com/terms/a/agencyproblem.asp

Murphy, C. (2019). Theory of the Firm. Accessed on 10^th August, 2020 via https://www.investopedia.com/terms/t/theory-firm.asp Ross, S. (2019). How Do Modern Corporations Deal with Agency Problems.Accessed on 11^th August, 2020 via https://www.investopedia.com/ask/answers/041015/how-do-modern-corporations-deal-agency-problems.asp