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Agency Problem【Deric Business Class】 - YouTube
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hey guys
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welcome to derek business class in this
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video
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i'm gonna explain to you a common
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problem happens in the corporations
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called agency problem
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for sole proprietorships or partnerships
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the management and the owners are
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usually the same group of people
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the management runs the business to
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satisfy its own goals
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needs and financial requirements usually
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there would be no conflict or less
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conflict
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however when a company moves from
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private to public ownership
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the management and the owners are now
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two different groups of people
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this is what we call an agency
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relationship
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the shareholders hire managers to run
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the company
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shareholders are the principals they are
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the boss of the company
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managers are the agents of the company
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so
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managers are representing the
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shareholders to run the business
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that's why there is agency problem
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because the management and the owners
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are two different groups of people
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management is supposed to work for the
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best interest of all shareholders
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but it may not be the case all the time
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there is conflict of interest between
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principal and agent
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to ensure managers work for the best
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interest of the shareholders
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the company has to pay for the agency
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cost
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agency cost arises from agency problems
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that are borne by shareholders
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represents a loss of shareholder wealth
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this is to maintain a corporate
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governance structure that minimizes
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agency problems
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whenever a manager owns less than 100
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percent of the firm's equity
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a potential agency problem exists
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in theory managers would agree with
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shareholder wealth maximization
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however managers are also concerned with
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their personal goals and needs
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such as high salary allowance
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bonus job security good working
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environment and flexible working hour
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but what the shareholders want would be
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high share price
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high dividend and high profit do you see
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that
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what shareholders want are different
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from what managers want
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this would cause the managers to act in
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ways that do not always benefit the
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firm's shareholders
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to solve agency problem first the
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company may implement management
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compensation plans
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incentive plans time management
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compensation to share price
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managers will be rewarded if the share
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price goes up
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for example the granting of stock
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options
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managers are given a special right to
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purchase the company's shares
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at a predetermined price within a
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stipulated period
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usually a cheaper price for the managers
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that receive stock options as their
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bonus reward
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now they become the shareholders of the
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company
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most likely they will put an effort to
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work their best
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to make the share price go up so that
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they can earn the best return from the
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stock options
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another similar management compensation
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plan is performance plan
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performance plans time management
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compensation tps
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or growth in eps eps is earnings per
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share
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something related to share price as well
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if the managers can hit the targeted eps
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reward the managers with shares or cash
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bonuses
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these plans can help align the needs of
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managers and shareholders
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so that managers are working for the
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shareholders benefits and their own
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benefits at the same time
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the second method to solve agency
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problem is by market forces
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shareholder activism through executing
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voting power
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shareholders participate in activities
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that can change the corporation
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for example if the shareholders are not
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happy with the existing management
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during annual general meeting they can
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elect new board of directors
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strong and independent bod can engage in
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dismissing an effective top management
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who causes agency problems bod can also
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replace poorly performing managers
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shareholder activism is usually done by
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the large institutional investors
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who hold large amount of shares so
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institutional investors play an
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important role in shareholder activism
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it is because they have more power to
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place pressure on the management to take
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actions
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and to maximize shareholder wealth the
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third method to solve agency problem is
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by threat of takeover
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this is an external force from outsiders
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when a firm's internal corporate
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governance structure is unable to keep
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agency problems in check it is likely
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that rival managers will try to gain
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control of the firm
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as they look for companies that are
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poorly managed and undervalued
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these rival managers from other
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companies are the potential acquirers
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the threat of takeover by another firm
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which is believed to enhance the
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troubled firm's value by restructuring
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its management
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operations and financing can provide a
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strong source of external corporate
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governance
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simply speaking in order to prevent the
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company to be taken over by other
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competitors
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the management will have to work
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properly for the benefits of
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shareholders so that agency problem can
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be solved because of the threat from
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competitors the last part for this video
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we will talk about the role of business
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ethics
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ethical behavior means doing the right
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thing
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but different people define right thing
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in a different way
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something that is right for me may not
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be right for you
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that's why a set of rules or laws is
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used to define the right thing
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everyone has to follow the rules or laws
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some examples of unethical behaviors
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such as misleading financial forecast
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insider trading fraud excessive
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executive compensation
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and bribery companies should avoid
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unethical behaviors
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because negative publicity often leads
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to negative impacts on a firm
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all right that's all for this video
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thanks for watching
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see you in the next one bye
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