Term Paper

On
Agency Theory and Need For Accounting
- A Study on ACI Ltd

Submitted By:
Nur Mohammad Foyel
MBA (Final Year)
Roll No : 310
Session : 2017-2018
Department of Accounting
Govt. College of Commerce. Chattogram.
Submitted To
Mr. Mohammad Jahangir
Lecturer
Department of Accounting
Govt. Commerce College, Chattogram

Date of Submission: 31 October 2019

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 Letter of Transmittal

October 31, 2019

To
Mr. Mohammad Jahangir
Lecturer
Department of Accounting
Govt. Commerce College, Chattogram

Sub: Submission of the Term Paper on Agency Theory & Need For Accounting.

Sir
I am greatly impressed by submitting the Term Paper on Agency Theory & Need For
Accounting- A study on ACI Ltd. for your cordial consideration and evaluation. I have studied
on relevant issues and tried my level best to collect information in this regard. I have also tried
to reflect all the findings of my study on this report to make it a rich one.
I would like to express my gratitude for your kind guidance in completed of the Term Paper
assigned for me. I sincerely hope that this report will meet your expectation and will serve its
purposes.

Yours Truly

_________________________
Nur Mohammad Foyel
MBA (Final Year)
Roll No : 310
Session : 2017-2018
Department of Accounting
Govt. College of Commerce. Chattogram.

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 Preface

Term Paper is one of the most important works of our MBA program. Now the world is
competitive. So we have to earn the knowledge about the critical environment of business. This
type of report helps the student to acquire practical knowledge about the contemporary business
world. It will also help the student to be an effective manager in future. Different organizations
formulate different kind of policies to operate their business. A reputed company like ACI faces
some problems every times. Agency Problem is one of them.

As a student of MBA of National University, I have been to assigned to prepare the Term
Paper on Agency Theory & Need For Accounting on ACI Ltd. I have tried my best with all
my ability to complete this Term Paper with perfection.

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 Acknowledgement

I would like to express my gratitude to all the people that were involved both directly and
indirectly in the preparation of this report. I apologize to the people whose names that I have
and not mentioned and their contribution is highly appreciated by me.
At first, I would like to thank my academic supervisor Mr. Mohammad Jahangir, Lecturer
Department of Accounting, Govt. Commerce College, Chattogram- for guiding me and for
imparting his time and wisdom. I want to thank all the officials of ACI that were involved. I
would to especially like to thank Md. Shahadat Hussain of ACI Chittagong Wing for giving
me time and sharing their thoughts and insights.
Finally, I want to express thanks to my parents whose influence and inspiration has enabled me
to complete this report.

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 Abstract

This article intends to review the theoretical aspects and empirical evidences made on agency
theory. It is aimed to explore the main ideas, perspectives, problems and issues related to the
agency theory through a literature survey. It discusses the theoretical aspects of agency theory
and the various concepts and issues related to it and documents empirical evidences on the
mechanisms that diminish the agency cost. The conflict of interest and agency cost arises due to
the separation of ownership from control, different risk preferences, information asymmetry and
moral hazards. The literatures have cited many solutions like strong ownership control,
managerial ownership; independent board members and different committees can be useful in
controlling the agency conflict and its cost. This literature survey will enlighten the practitioners
and researchers in understanding, analysing the agency problem and will be helpful in
mitigating the agency problem.

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 Table of Contents
1.0 Chapter One: Introduction

1.1 Definition of Agency Theory

1.2 The separation of ownership and control

1.3 Criticism of Agency Theory

1.4 Key Takeaways

1.5 Incentivizing Employees

1.6 Standard Principal-Agent Models

2.0 Chapter Two: Database

2.1 Objective of The Study

2.2 Scope And Methodology of The Study

2.3 Limitations Of The Study

3.0 Chapter Three: Overview of ACI Ltd.

3.1 History

3.2 Product and Services of ACI

3.3 Credit Procedure of ACI Limited

3.4 Types of Credit Customers

3.6 Tender Credit

3.5 Credit to small, medium & large private organization:

3.7 Credit to Government, Autonomous and Semi-Autonomous

Institutions:

3.8 Super Market / Modern Trade:

3.9 SWOT Analysis

4.0 Chapter Four: Theoretical Analysis

4.1 Definition of Agency

4.2 What Is the Agency Problem

4.3 Types of Agency Problems

4.4 Ways of Solving Agency Problems

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5.0 Chapter Four: Agency Theory Practice in ACI

5.1 Agency Problems arises in ACI

5.2 The ways how ACI solves the agency problems:

5.3 Steps taken by ACI for Controlling of the Agency Problem

6.0 Chapter Five: Recommendation & Conclusion

6.1 Recommendations:

6.2 Conclusion

References

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 1.0 Chapter: One
Introduction

1.1 Definition of Agency Theory

Agency theory is a principle that is used to explain and resolve issues in the relationship
between business principals and their agents. Most commonly, that relationship is the one
between shareholders, as principals, and company executive, as agents.
Key concepts of Agency Theory
A number of key terms and concepts are essential to understanding agency theory.
 An agent is employed by a principal to carry out a task on their behalf.
 Agency refers to the relationship between a principal and their agent.
 Agency costs are incurred by principals in monitoring agency behaviour because of a
lack of trust in the good faith of agents.
 By accepting to undertake a task on their behalf, an agent becomes accountable to the
principal by whom they are employed. The agent is accountable to that principal.

1.2 The separation of ownership and control

Agency theory can be applied to the agency relationship deriving from the separation between
ownership and control.

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  Companies that are quoted on a stock market such as the London Stock Exchange are
often extremely complex and require a substantial investment in equity to fund them, i.e.
they often have large numbers of shareholders.
 Shareholders delegate control to professional managers (the board of directors) to run
the company on their behalf.
 The Directors (agents) have a fiduciary responsibility to the shareholders (principal) of
their organization (usually described through company law as 'operating in the best
interests of the shareholders').
 Shareholders normally play a passive role in the day-to-day management of the
company.
 Directors own less than 1% of the shares of most of the UK's 100 largest quoted
companies and only four out of ten directors of listed companies own any shares in their
business.
 Separation of ownership and control leads to a potential conflict of interests between
directors and shareholders.
 The agents' objectives (such as a desire for high salary, large bonus and status for a
director) will differ from the principal's objectives (wealth maximisation for
shareholders).
1.3 Criticism of Agency Theory
What are the incentive initiative of Agency Theory
Agency problems—also known as principal-agent problems or asymmetric information-driven
conflicts of interest—are inherent in many corporate structures. This conflict arises when
separate parties in a business relationship, such as a corporation's managers and shareholders, or
principals and agents, have disparate interests. Principals hire agents to represent the principals'
interests. Agents, working as employees, are assumed and obligated to serve the principal's best
interests. Problems occur when the agent begins serving different interests, such as the agent's
own interests. Thus, conflict occurs between the interests of principals and agents when each
party has different motivations, or incentives exist that place the two parties at odds with each
other. Corporations employ several dynamic techniques to circumvent static issues resulting
from agency problems, including monitoring, contractual incentives, soliciting the aid of third
parties, or relying on other price system mechanisms. The study of agency problems is ongoing
in both corporate and academic circles. Increasingly, contract design limits are recognized and
corporations are turning to different incentive mechanisms.

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1.4 Key Takeaways
 The agency problem is a conflict of interest inherent in any relationship where one party
is expected to act in another's best interests.
 In corporate finance, the agency problem usually refers to a conflict of interest between a
company's management and the company's stockholders.
 The manager, acting as the agent for the shareholders, or principals, is supposed to make
decisions that will maximize shareholder wealth even though it is in the manager‘s best
interest to maximize his own wealth.
 Agency problems can be mitigated with the right incentives and contract design.

1.5 Incentivizing Employees

If agents are acting in accordance with their own interests, changing incentives to redirect these
interests may be beneficial for principals. For example, establishing incentives for achieving
sales quotas may result in more salespeople reaching daily sales goals. If the only incentive
available to salespeople is hourly pay, employees may have an incentive for discouraging sales.
Creating incentives that encourage hard work on projects benefiting the company generally
encourages more employees to act in the business's best interest. By aligning agent and principal
goals, agency theory attempts to bridge the divide between employees and employers created by
the principal-agent problem.

1.6 Standard Principal-Agent Models

Financial theorists, corporate analysts, and economists often use principal-agent models to study
and offer solutions for problems that result from conflicts of interest in business arrangements.
These models are constructed to spot and minimize costs.
An agency relationship exists whenever one party's actions affect his own welfare and the
welfare of another party in a contractual relationship. Most agency experts attempt to design
contracts that can align the incentives of each party in a more efficient manner. Traditionally,
such contracts result in unintended consequences, such as moral hazard or adverse selection.
Principal-agent models form the basis of agency theory. Agency theory states that labor and
knowledge are imperfectly distributed (asymmetrical) and that additional measures are
necessary to correct these distributive inefficiencies.

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 2.0 Chapter: Two
Database

2.1 Objective of The Study

The main objective of this study is to fulfill the academic requirement as well as together
practical and theoretical knowledge about the company. This practical knowledge will help me
face challenges in future business career. In addition to the principle objectives, the following
are the common but significant objectives of this type of study:

 To examine the theoretical analysis of value chain model practices in Vanguard Dresses
Limited.
 To find out the existing problem of Vanguard Dresses Limited & recommendation for
better solution.

2.2 Scope And Methodology of The Study

During the period of case study, there was an excellent opportunity to have a clear idea about
the ACI. In addition, to prolong research according to the assigned topic, have to collect data.

There are various methods of collecting data. For this purpose, it has to gone through Primary &
Secondary source and at the same time, it as possible to have some practical experience about
application of tools and techniques of the value chain model.

The main sources are:

1. Primary Data
2. Secondary Data

 Primary Data:
1. Practical Desk Work
2. Personal Interview with the personnel of the company
3. Some practical experience about application of tools and techniques of the value
chain model
4. Office documents
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  Secondary Data:
5. Annual Report
6. Manuals of Vanguard Dresses Limited
7. Web Sites
8. Other Documents

In this report I have followed the guidelines provided by my honorable supervisor.

2.3 Limitations Of The Study

In case of any research limitation is a must. Limitation acts as barriers to do something. Like all
other researchers I have also faced some limitations. But I have tried to the extreme level to
collect the maximum information. While I was preparing the report; I faced some problems,
which are given below:

 I have been allowed only 1 months for the Internship, which is not enough to study the
Industry in depth.
 For the Company strategy, the authority not providing confidential internal data.
 The rate of success of my study may be limited as I might have failed to collect proper
information due to lack of my experience,
 Lack of adequate information due to not resourceful web materials.

I, therefore, hope that this report will be evaluated with an approach subject to the recognition of
the above-mentioned shortcomings.

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 3.0 Chapter: Three
Overview of ACI Ltd.

ICI Bangladesh Manufacturers Limited was a subsidiary of world renowned multinational ICI
Plc and was a listed public limited company under Dhaka Stock Exchange. In 1992 ICI Plc
divested its shareholding through a management buyout and the company name was changed
from ICI Bangladesh Manufacturers Limited to Advanced Chemical Industries (ACI) Limited.
ACI Formulations Limited, a subsidiary of ACI, became a public listed company through direct
listing.
ACI‘s mission is to achieve business excellence through quality by understanding, accepting,
meeting and exceeding customer expectations. ACI follows International Standards on Quality
Management System to ensure consistent quality of products and services to achieve customer
satisfaction. ACI also meets all national regulatory requirements relating to its current
businesses and ensures that current Good Manufacturing Practices (cGMP) as recommended by
World Health Organization is followed properly. ACI has been accepted as a Founding Member
of the Community of Global Growth Companies by the World Economic Forum which is the
most prestigious business networking organization. (Corporate: ACI Limited Bangladesh)

3.1 History
Advanced Chemical Industries (ACI) Limited is one of the leading and largest local
conglomerates in Bangladesh. ACI consists of different business groups namely:
Pharmaceuticals, Consumer brands, Agro-Business. ACI is the first company in Bangladesh
who achieved both the ISO9001 certification of Quality Management System in 1995 and the
ISO14001 Certification for Environment Management System in 2000. ACI is a public limited
company listed in DSE and CSE. Beside this, the company has a large list of international
associates and partners with trade and business agreement. Today ACI is one of the fastest
growing companies in Bangladesh.
ACI was so named in 1992. But the history of ACI dates back to 1926, when Imperial Chemical
Industries (ICI) was incorporated in the United Kingdom as four companies namely Novel
Industries Limited, British Dyestarts Corporation, Brunner Mond and Company Limited and
United Alkali Company merged. Since then ICI plc has been operating worldwide as a
multinational company.

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In the year of formation ICI started operation in the Indian subcontinent in the name of ICI
(India) limited. After separation of the India and Pakistan in 1947, the Karachi office of ICI
(India) Limited renamed to be ICI (Pakistan) Limited.

3.2 Product and Services of ACI

ACI has diversified into four major strategic business divisions which include Health Care,
Consumer Brands, Agribusinesses and Retail Chain.

Strategic Business Units:

1. Pharmaceuticals
2. Consumer Brands
3. Agribusiness
 Animal Health
 Crop care & Public health
 Fertilizer
 Cropex
 Seeds

Subsidiaries:
 ACI Formulations Ltd.
 ACI Agrgochemicals
 Apex Leathercrafts Limited
 ACI Salt Limited
 ACI Pure Flour Limited
 ACI Foods Limited
 Premiaflex Plastics Limited
 Creative Communication Limited
 ACI Motors Limited
 ACI Logistics Limited

Joint Ventures:
 ACI Godrej Agrovet Private Limited
 Tetley ACI (Bangladesh) Limited
 Asian Consumer Care (Pvt) Limited
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3.3 Credit Procedure of ACI Limited
Purpose of the Policy
The Company does not permit credit to be used as the only tool for increasing sales. Credit may
be offered to customers to facilitate their process of purchase. Credit should not be extended to
those who cannot otherwise afford to purchase or whose credit record is not clean. Credit is
expensive if it turns into bad debt and therefore credit is to be offered with caution and care.
Credit given to a wrong customer will ultimately result in bad debt and collection efforts may
create bad relationship with the defaulted customer. It is better to sell less quantity or at a lesser
margin in cash rather than sell more on credit to customer who would not pay.
The granting of credit is a powerful selling aid and is a fundamental foundation upon which all
trading relationships are built. Keeping that in mind, the company recognizes the necessity of
allowing credits to intending customers in line with current industry practice. It is felt that under
current business scenario, achieving expected business growth would be difficult unless we have
a prudent credit policy to support the deserving customers. It is expected that credit facilities
will allow us to achieve our business objectives. However, at the same time it is also to be
ensured that field personnel will maintain appropriate balance between increased sales through
enhanced credit facilities and risks associated with default credits.
This Credit Policy will be effective from 01 February 2014.

3.4 Types of Credit Customers

Deposit Credit Customer
The company offers handsome Bonus against cash deposit and extends credit to such customers
up to a limit of cash deposit. Financial Return will only be applicable when the customer will
ensure complete security for the credit offered to him. For such cash deposits the Bonus is
calculated at the rate of 9% per annum. The Bonus is paid half-yearly in July and January into
the depositor‟s account. The Bonus is payable only if the credit outstanding is settled by the
customer within the credit period. The deposit can be withdrawn by the customer fully or
partially at any time without prior notice and without any penalty, after full adjustment of the
entire outstanding credit balance.
An agreement is to be signed outlining the conditions of payment of Bonus and the facilities
available for deposit credit customers as per ―Annexure C 1‖. In addition, the application for
credit facility has to be made as per ―Annexure A 1‖ (only application form) and ―Annexure A‖.
Credit is given for 30 days and the entire amount invoiced is to be settled by the due date.

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Credit to Dealer
Dealers are not consumer themselves but they facilitate in the business process. They are to
invest capital in order to be able to run a business. The credit to dealer must be supported by an
undated MICR cheque made out favoring of ACI Limited.
Credit proposal is to be made with a letter (Annexure A1) and on a form (Annexure A). The
proposal goes through proper security, verification of the credentials and credit worthiness of
the customer. The process takes at least 01 week and cannot be rushed. If credit facility is
approved, credit limit is fixed and the customer is to provide an undated cheque for the amount
of the credit limit. The signature on the cheque has to be verified by Bank. The customer is to
sign an agreement (Annexure C2).
Generally credit is given for 30 days and the entire amount invoiced is to be settled by the due
date. However, 15 days buffer facility can be allowed for this group of customers only for single
invoice. Credit limit will be automatically blocked once the customer exceeds payment due date.
Default in timely payment or failure to return the goods unsold along with payment of the
balance, will result in suspension of credit facility. Continued default will result in cancellation
of credit agreement and stating of proceeding to recover the total outstanding amount.
Credit limit will be initially fixed on the basis of potential of the customer. After several
transactions the sales manager may propose revision of credit limit to a higher or lower level,
based on the value and the frequency of transaction with the customer.

3.5 Credit to small, medium & large private organization:

Private organizations have limitations in providing blank cheque. In such cases normal credit
procedure will be followed and the requirement of providing security cheque may be exempted
by the Executive Director for specific customers at his discretion by keeping Finance-credit
informed.
In this category of customers, credit is provided against the work order/purchase order of the
customers. The credit is provided for maximum 30 days period. Credit limit is fixed by the
value of valid work order. As soon as the invoices against the work order are raised the credit
limit will automatically be blocked.

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Before providing the credit facility an official format of work order/purchase order along with
the signature of the persons who are authorized to issue purchase order need to be submitted. A
valid work order must contain the followings:
1. Date of order
2. Name and quantity of the product order
3. Total value of the order
4. Date of delivery
5. Seal and signature of the authorized personnel of the company
6. Date of payment

3.6 Tender Credit

Tender credit will require special approval from the Executive Director. He will consider them
on a case to case basis and all such approvals of credit will be in writing and specific to
a particular tender, mentioning bid bond (if any) required for the tender and outlining the entire
tender procedure and timeline of follow up and recovery of the bid bond and obtaining the
payment. A copy of such written approval will be provided to Finance to monitor the credit and
chase the Bid Bond.

3.7 Credit to Government, Autonomous and Semi-Autonomous Institutions:

If the customer is found to be satisfactory pay master from past dealings, credit could be
extended to government institutions. The credit period would be for 30 days and limit will be
fixed by the tender value/work order value.

Quite often credit to government institutions remain outstanding for such a long time that
financing cost of the amount is sometimes greater than the margin made by the company in that
transaction. The government institutions that are well known for the delay in payment should be
encouraged to buy on cash. A discounted price may be negotiated as an inducement to buy
against cheque. Large supply in one lot should be discouraged because that may lead to large
volume leakage to traders and result in under rating. In all these cases sales/business will apply
due diligence as well as other measures to encourage quick return of company‘s money.

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3.8 Super Market / Modern Trade:
In case of providing credit facility to this category of customers all necessary documents and
application forms has to be fulfilled as provided in ―Annexure A1‖ and ―Annexure A‖. Credit to
super market must be supported by an undated cheque amounting equal to the approved credit
limit, made in favor of ACI Ltd by the proprietor himself from his own personal/company
account. Here the amount of submitted un-dated cheque will act as the credit limit of the super
market. The owner of the super market or his authorized nominee has to sign an agreement with
ACI Ltd as attached in ―Annexure C 2‖.

Short Term Credit (STC)

Short term credit (STC) means a particular pre-approved customer whose accounts revolve
within a calendar month without any security instrument. The customer has to have a shop in a
suitable location for Electrical Business.
To improve market share and volume of sales, penetrate small customers in root level, pick up
periphery market, achieve our national sales target with significant growth, company desired to
pick these type of customers through employee (to secure debtors). The terms and conditions of
STC are described below:
1. Marketing Officer/Sales Officer will find out suitable customer and propose to Area
Sales Manager (ASM) or Area Sales Executive (ASE) by fulfilling the prescribed form
as stated in the Annexure H. ASM/ASE forwards the list to Head of Sales/Sales Manager
(SM) for his comments and scrutiny. HOS/SM will provide STC customer list using
Annexure I to BM for his recommendation and send the proposal to Finance-Credit for
verification.
2. Finance-Credit will assess those proposals and give their comments on the proposal
regarding past transaction and credit worthiness which will duly be approved by ED, CB
once he is satisfied with the findings.
3. STC credit will not exceed tk.80, 000 for an individual ASE/ASM.
4. STC will not be applicable for existing credit customers.
5. A customer will be allowed multiple orders for STC if the total order amount within
approved credit limit of tk.80, 000.

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 6. If any customer fails to pay STC within the calendar month, the respective field
personnel are encouraged to take back the goods to adjust the account by last day of each
month. However, it may allow another 30 days to settle the account as special case if
HOS/SM gives special permission to do the same.
7. Both MO/SO & ASM/ASE will be responsible to collect this STC credit. If MO/ASE
fails to maintain the STC as per policy, proportionate salary & monthly expenses will be
deducted from next month (after 60 days) under the advice of HOS/SM. In case of
misappropriation of sales proceeds and products, the unsettled STC credit will be
adjusted from his final settlement under the advice of BM, CB.
8. MO/SO will bring the unsold products from the customers‟ outlet in his own risk and
handover to depot in-charge and make necessary adjustments. In voice part return will
be allowed according to distribution policy.

Supply on Credit
On basis of a written order by a customer, a Credit In voice or a Delivery Challan will be raised
by Distribution Department. The goods must be delivered directly to the customer or his
authorized agent. Signature and seal of authorized agent should be obtained on the delivery
document. Distribution Department must not deliver goods to any company employee or to any
third party. Products should be either collected by the customer or delivered to the customers‟
business premises by the Distribution Staff. Sales Staff should not be involved with the delivery
of products to customers. If customer needs redistribution support from ACI, he/she will first
receive products with seal and signature.

Central Credit Coding

To have the better control over credit operation, central credit coding has been introduced.
Finance-Credit will initiate every new Credit Code and will modify the credit limit of existing
credit customer as modified by the Executive Director. No single customer should be allowed to
open multiple credit accounts. Exceptions can be made only for institutions having different
delivery points or different companies, which will require written approval of the Executive
Director.

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3.9 SWOT Analysis
SWOT analysis refers to analysis of strengths, weaknesses, opportunities and threats of an
organization. This facilitates the organization to make its future performance improved in
comparison to its competitors. An organization can also study its current position through
SWOT analysis. For all of these, SWOT analysis is considered as an important tool for making
changes in the strategic management of an organization. Through direct observation and
discussion with the ACI officials I am able to point out some major strength and weaknesses as
well as some threats and opportunities regarding the various issues of ACI such as –
 Service level
 Operational efficiency
 Technology
 Employee efficiency etc. along with many other issues

Strengths-
Top Management
ACI Limited is operated by a very efficient management group. The top management officials
have all worked in reputed organizations and their years of experience, skill, and expertise will
continue to contribute towards further expansion of the organization. So, the top management of
the organization is the major strength for ACI Limited.
Corporate Culture
ACI has an interactive corporate culture. The working environment of ACI is very friendly,
interactive and informal. And, there are no hidden barriers or boundaries while communicate
between the superior and the employees. This corporate culture works as a great motivation
factor among the employees.
Various Products and Services
ACI offers various types of products and services to their customers. So those, Customers can
choose the right products that will fulfill their needs.
Strong employee bonding and belongings
ACI employees are one of the major assets of the company. The employees of ACI have a
strong sense of commitment towards organization and also feel proud and a sense of belonging
towards ACI. The strong organizational culture of ACI is the main reason behind its strength

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Weakness-
Competitive market
ACI Limited has many competitors in the market. When they setup their product price or
promoting new new product, they always have to think about their competitors and they are
bound to setup the lower price. Therefore, it is heavily affect on their profit.
Cost
Cost is very much important for manufacturing company. They always have to think about their
cost. As we know that manufacturing company year by year gradually reduce their cost but ACI
limited are unable to reduce their cost that much.
Opportunities-
Growing demand
Day by day ACI product demands are increasing and this is a great opportunity for the ACI to
introduce new product for their customers. If they are utilizing their opportunity in future, they
will earn more profit.

New acquisitions
Already ACI acquire some company and they earn lot of profit from those acquiring company.
In future if they do some acquisition contract with some renowned brad then they can earn more
profit from this segment.
New products and services
As their competitors, introduce new product and services frequently. ACI Limited should
introduce new product and services for their customers.
Threats-
Similar products are offered by others
ACI Limited introduces lots of product but these are very much similar with their competitor.
So ACI have to more creative to introduce new product and should do some barites on their
product.

Increase in labor costs

For manufacturing company labor cost is a very big threat for the organization. ACI labor cost
comparatively higher than their compactors.
Increased competition in the market
ACI Limited doing their business in competitive market. So this is big threat for ACI limited to
doing business in competitive market.
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 4.0 Chapter: Four
Theoretical Analysis

4.1 Definition of Agency:

Fiduciary relationship between two parties in which one (the 'agent') is under the control of (is
obligated to) the other (the 'principal'). The agent is authorized by the principal to perform
certain acts, for and on behalf of the principal. The principal is bound by the acts of the agent,
performed in carrying out entrusted duties and within the scope of agent's authority. An agency
can be created by bellow:
(1) Express agreement, whether oral or written
(2) Implication, based on the custom or practice of the trade, or
(3) Conduct of the principal.
Under the legal doctrine of estoppel, the principal is prohibited from denying the existence of a
properly constituted agency. Creation of agency is essential to commercial and financial
transactions, because an organization (as a legal entity) can function only through its agents.

4.2 What Is the Agency Problem?

The agency problem is a conflict of interest inherent in any relationship where one party is
expected to act in another's best interests. In corporate finance, the agency problem usually
refers to a conflict of interest between a company's management and the company's
stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to
make decisions that will maximize shareholder wealth even though it is in the manager‘s best
interest to maximize his own wealth. The agency problem does not exist without a relationship
between a principal and an agent. In this situation, the agent performs a task on behalf of the
principal. Agents are commonly engaged by principals due to different skill levels, different
employment positions or restrictions on time and access. For example, a principal will hire a
plumber — the agent — to fix plumbing issues. Although the plumber‗s best interest is to
collect as much income as he can, he is given the responsibility to perform in whatever situation
results in the most benefit to the principal.

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KEY TAKEAWAYS
 Agency problem is a conflict of interest inherent in any relationship where one party is
expected to act in the best interest of another.
 Agency problem arises when incentives or motivations present themselves to an agent to
not act in the full best interest of a principal.
The agency problem arises due to an issue with incentives and the presence of discretion in task
completion. An agent may be motivated to act in a manner that is not favorable for the principal
if the agent is presented with an incentive to act in this way. For example, in the plumbing
example, the plumber may make three times as much money by recommending a service the
agent does not need. An incentive (three times the pay) is present, and this causes the agency
problem to arise.

4.3 Types of Agency Problems

Agency problem can be considered as:
1. Managers Vs Shareholders
2. Creditors Vs Shareholders
3. Owners Vs Other parties
Brief discussion of each category of agency problem is specified below:

1. Managers Vs Shareholders
In situation of Joint Stock Company ownership is separated from management. For this motive,
Shareholders directly cannot take part in managing. The obligation or responsibility of
management is on the hand of proficient manager. Sometimes proficient managers give
importance to their own interest without consideration to shareholder‘s interest. As a
consequence, conflict of interest amongst Managers and Shareholders is formed.

2. Creditors Vs Shareholders
Creditors want to have principal and interest payment from shareholders timely. But
shareholders are not ready to pay the claim of the creditors from their own income if sufficient
amount of profit is not produced by the company. As a consequence, conflict arises. Sometimes
on behalf of shareholders hurt the interest of bondholders by investing in a very high risky
project which is financed by debt capital.

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3. Owners Vs Other parties:
Owners want to take full advantage of wealth. On the other hand, suppliers, buyers, employees,
and other parties want to have increment of salary, high quality products with fewer prices, on
time payment of bill etc. As a consequence, the interest of owners is hampered.

4.4 Ways of Solving Agency Problems

If the conflict regarding agency problem increase rapidly then it can make a big cause for an
industry or an institution. So if any agency problem arise then it should be reduced immediately
for the betterment of the company.

A company can reduce agency problems by followings bellow:

 Manager‘s activities must have to come in under control & strong supervision.

 Various facilities should be incised & motivate all parties so that they can realise that
they belongs to their own company.

 Planning should be done and execute to increase the productivity of the stakeholders.

 Take punishable steps such as: Termination, Suspensions etc.

 Make a fear able realization that the company will be adopted by other company if the
agency problem should not end.

 Problems with other parties like- Bank, Creditors etc. should be short out immediately.

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 5.0 Chapter: Five
Agency Theory Practice in ACI

5.1 Agency Problems arises in ACI

Though ACI is a very renowned company but there is also fond to happen some agency
problems which is described bellow:
1. Managers Vs Owners
2. Creditors Vs Owners
3. Senior management Vs Junior management
4. Owners Vs Other parties

1. Managers Vs Owners:
Owners of ACI is separated from management. For this motive, owners directly cannot take part
in managing. The obligation or responsibility of management is on the hand of proficient
manager. Sometimes proficient managers give importance to their own interest without
consideration to shareholder‘s interest. As a consequence, conflict of interest amongst managers
and owners is formed.

2. Creditors Vs Owners:
Creditors want to have principal and interest payment from owners timely. But being a large
company and having other issues to solve and also of shortage of time, owners are not ready to
pay the claim of the creditors from their own income if sufficient amount of profit is not
produced by the company. As a result, conflict arises. Sometimes on behalf of shareholders hurt
the interest of bondholders by investing in a very high risky project which is financed by debt
capital.

3. Senior Management Vs Junior Management:

As ACI is one of a large company there are lots of employees takes part in different roles. Like
that there are different categories of Senior & Junior Managerial hierarchy. Sometimes conflict
between senior management and junior management arises. Senior management involved with
the policy creation. These policies are applied by lower level management. As a consequence,
conflict arises between management acts as the agent.

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4. Owners Vs Other parties:
There are lots of external parties of ACI who are directly or indirectly involved with the
production and distributions of ACI Products. Owners want to take full advantage of wealth. On
the other hand, suppliers, buyers, employees, and other parties want to have increment of salary,
high quality products with less prices, on time payment of bill etc. As a result, the interest of
owners is hampered.

5.2 The ways how ACI solves the agency problems:

Conflict of interest between the shareholders and managers can be resolved through the
mechanism of agency costs and market forces that reward the managers for their good
performance and punish them for poor performance. The performance of managers should be
evaluated through the market price of shares. Higher the market price of the shares, better the
performance of managers and vice versa. Some of the specific mechanisms that ACI follows to
resolve the agency problem between managers and shareholders are briefly described below:

1. Managerial Compensation:
ACI arranges managerial compensation that is the incentive mechanism for the good
performance of the management. Their objectives are to attract and retain able managers and to
harmonize managerial actions with the interest of shareholders. Several measures are used to
evaluate managers' performance. Some of the most common are sales, profit, current value of
expected cash flows and value added.

2. Shareholder control and interference

Shareholders of ACI influence the company's management in two ways. Firstly, they influence
management directly as to how the company should be managed. Secondly, any shareholder
make a proposal which is voted on at the Annual General Meeting (AGM).

3. Threat of dismissal
In the past it seldom happened that a senior manager or chief executive officer was dismissed by
shareholders of ACI. The reason for this was possibly that the ownership of a great number of
companies was dispersed, as well as the fact that the agency problem was only brought to the
attention of shareholders (and management) over the past two decades.

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4. Threat of take-overs
The threat of a take-over serves to monitor the actions of management. If the actions or
decisions of management decrease the future earnings or value of shareholders, the share price
usually decreases as well. In some instances, the company can become a take-over target. If the
management of such a company is replaced, the move can benefit the shareholders. The threat
of take-overs can thus serves as an external control mechanism which ensures that the decisions
and actions of management maximize shareholders' wealth.

5.3 Steps taken by ACI for Controlling of the Agency Problem

In order to prevent the managers to abuse their position and power and protect their interests,
ACI use several different mechanisms. In the text that follows, the measures are divided into
two groups first and then analyzed:
a) Internal measures:
 Internal audit;
 Change in the salaries and payments of the managers;
 Concentrate ownership;
 Good corporate governance/management.
b) External measures:
 External audit;
 Market of capital;
 Law/legal frame.

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 6.0 Chapter: Six
Recommendations & Conclusions

6.1 Recommendations:
Agency costs increasingly become a significant part in a business‘s expenditure. For years,
many scholars and practitioners have contributed their time, knowledge, experiences in
researching, and published many papers about agency problems. They recommend and also
prove these recommendations through empirical tests on how to mitigate the costs from agency
problems and enhance the firm‘s performance. I suggest ideas for further research. The
remainder of this paper is organized as follows: part 2 is a literature review about agency
problems and mechanisms to mitigate agency problems; part 3 is a list of recommendations for
managers and suggestions for further research; part 4 is the conclusion.
 Compensation structure
The conflicts of interest between managers and shareholders cause agency costs.
Shareholders put money into a company, and they want their wealth maximized.
Managers are hired to manage the company‘s day-to-day activities. They invest their
human capital in the company, and they want to maximize their investments as well. If
the interests of the managers are attached to those of the shareholders‘, this divergence is
solved. Stemming from this approach, companies offer incentive compensation to
executives as a way of encouraging them to act in value-added ways to shareholders.
Thus, in the executives‘ incomes, besides basic salaries and quarterly bonuses, there are
some incentive payments tied to their company‘s performance in order to encourage
executives to pay more attention to long-term performances. There are two popular types
of incentive compensation: stock ownership and stock-option grant.

 Corporate Governance
Corporate governance is also a mechanism used to deal with agency problems. Managers
are hired to operate the company; in order to prevent them from deviation, one solution
is to monitor them: look at their activities so that shareholders can stop any improper
decisions before they become worse. Governance is mostly exercised by the board of
directors who control executives based on the company‘s rules and regulations. Usually
board members are also firm executives. People debate that if executives can control
themselves, then shareholders do not need to establish supervisory boards. Then outside

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 directors, representatives of large shareholders, institutional shareholders, mutual funds,
and even the state are nominated for boards of directors with the expectation of
increasing supervisory effectiveness.

 Capital Structure
The roots of agency problems are the imperfect alignment of the principals‘ and agents‘
interests. Managers do not only work for the company‘s benefit but also for themselves.
These personal benefits include consuming excessive perquisites such as luxurious
vacations, overseas conferences, or investing in projects that are risky and do not
enhance the value of the shareholders.

 Recommendation to Managers
There are many approaches to mitigating the agency problems in which internal
governance approaches such as compensation structure, direct monitoring, and capital
structure can be applied by a company management decision. However, for external
governance mechanisms such as government regulations or corporate take-over market
mechanisms, the company cannot decide by itself (Cheng & Indjejikian, 2009). I will
now provide recommendations about factors related to the approach choices the
company can choose effective internal mechanisms on its own.

These recommendations are drawn from the review of previous studies. However, these studies
are not perfectly homogenous. The data sources are varied and the methodologies for analyzing
these data are also different between the studies.
6.2 Conclusion
With the purpose of synthesizing the agency problems in businesses and internal solutions for
these problems and recommending factors that affect the mechanism choices, I arranged my
paper by starting with reviews of agency problems from equity and from debts. Then I reviewed
three popular internal mechanisms for dealing with agency problems including compensation
structure, governance structure, and capital structure. I concluded with recommendations for
conditions to take into account when choosing a remedy such as country of origin, size, age,
company‘s capital structure, and type and level of existing agency problems. With the increase
of agency costs in companies‘ expenditure, how to choose effective mechanisms to mitigate
these costs becomes a significant decision.

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 References
[1] Office file of ACI
[2] Text Book of MBA
[3] www.wikipidea.com
[4] www.google.com
[5] www.mshshihab.webs.com
[6] online tuotorials
[7] reference books
[8] Seniors Advice

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