University of Cebu-Banilad Campus

College of Business Administration and Accountancy

ASSIGNMENT_005
Agency Problems and Accountability of Corporate Managers and Shareholders

Class No. ____ Complete Name: __________________________

Diaz Bauste, Elizabeth Carmen Socorro C. May 11, 2021
Date: ____________________
Subject & EDP CODE: ___________________________________
BA 8 / 74384 Course & Yr.: ______________
BSBA - 4

ESSAY QUESTIONS

1. What are the principal agents specific issues? Define each.

2. What is an agency cost?
3. What are the legal requisites for derivative suit?
4. Why predators company affects external forces of governance?
5. What are the difference between stock market and stock exchange?

ANSWERS:

1. (a) DIVERSIFICATION VS. DIVIDENDS

Diversification - Use of free cash flows which are by description, resources of the principal generated after
investment in all projects, Managers prefer this funds to be invested in additional product diversification.

Dividends - Shareholders prefer the funds to be declared as dividends as long as it is backed by income.
Control on how the available funds will be used or invested is another example of agency problem.

(b) MANAGERIAL OPPORTUNISM

There are examples or instances wherein shareholders return will not be maximized to the fullest because
of unrelated diversification and growth which leads to increase compensation for managers not to mention
that reduces the employment risk of top manager. This explains why we see some subsidiary companies
that are still alive even when they are becoming more of a liability than an asset to the holding company.

(c) POWER SUPREMACY VS. TECHNICAL EXPERTISE

It is not that these shareholders doesn’t know how to run their own corporation; it is just that they have
excess funds and they want to have productive placement of these funds. The nature of their intention
made them rely only on expertise of the agents. What is left to the shareholders is supreme power over the
corporation. It is clear picture of agents doing the real things and principal waiting for the ultimate results.

(d) TRUST
Shareholders have more trust than doubts to the agents and they are entrusting everything as far as
operation including the charting of the corporation’s future to its directors and officers. It is the kind of
comfort that agents are taking pleasure from that would sometimes make them lose their balance. THIS
FAILURE IN BALANCE IS ONE OF THE ESSENTIAL COMPONENT OF MANAGERIAL OPPORTUNISM; THE
PREVAILING AGENCY PROBLEM.

2. Agency cost is a resource to be sacrificed to keep an eye on things that are perceived or need to be closely
controlled from the perception of the principal are significant costs in a principal-agent relationship. It is a
type of internal company expense, which comes from the actions of an agent acting on behalf of a principal.
Agency costs typically arise in the wake of core inefficiencies, dissatisfactions, and disruptions, such as
conflicts of interest between shareholders and management.
3. (a) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at
the time the action was filed; (b) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires; (c) No appraisal rights are available
for the act or acts complained of; and (d) The suit is not a nuisance or harassment suit.

4. These are the corporations that are always on the watch and waiting to takeover a certain company, be it via
friendly or hostile takeover. Knowing in mind that there are predator companies that are waiting for a chance
to take over in a certain company, the management and the person in charge in corporate governance and
organization are more careful of their actions and their decision are very well considered before implemented
because they know that one mistake may destroy the whole company or the reputation of the company.

5. The stock market represents the companies that list equity shares for public investors to buy and sell. Stock
exchanges are the infrastructure that facilitate the trading of those equity securities, or stocks. Without a
stock exchange, companies would have no formal mechanism on which to list shares, and without a stock
market, exchanges would have no reason to exist. Stock exchanges can be electronic or manual, and they
provide telling information about the size of the stock market.