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The Challenges of Agency Theory | Yale SOM Executive Education - YouTube
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agency theory points the idea that the
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managers and the directors of the
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company are agents to the owners of the
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company or the shareholders agency
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theory has also been called shareholder
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primacy the idea that shareholders are
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really the ones that need to be listened
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to whenever the directors or the
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management of the company are making a
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decision agency theory also has
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implications both on the company and on
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society one of the biggest challenges
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that have arisen because of agency
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theory is a vacuum of accountability
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agency theory says that the owners or
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shareholders are responsible for the
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actions of the company and yet the
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owners and shareholders do not manage
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the company that's done by the
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management and the directors and
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therefore we have a difference between
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who is responsible for the impacts and
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implications of the company and this
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creates that vacuum of accountability
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where a company can create
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negative impacts on the environment and
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society but there is no one within the
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company that is responsible for those
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impacts the second challenge from agency
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theory has been the externalization of
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environmental and social aspects
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if we consider that shareholders as
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owners are the only ones responsible for
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the direction of the company then that
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implies that we need to externalize all
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costs in the interest of maximizing
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profit and revenue for the company that
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means that if i can put costs up for
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environmental impact and degradation
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onto someone else other than the company
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that is good for the owner or the
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shareholder because we're assuming that
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owner is only interested in short-term
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profitability well that has implications
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where that cost goes that cost is then
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externalized to the environment it is
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externalized to communities and this is
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true across a lot of sustainability
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issues
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where we assume shareholders are
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interested in short-term profit
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maximization then those externalities
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are by definition pushed out of the
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company onto other people around the
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company and you can see in the world of
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sustainability that becomes a huge
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challenge for how we convince a company
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that it needs to take responsibility and
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take action for these sustainable issues
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the third potential challenge with
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agency theory is that it can have an
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effect of exacerbating inequality
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if a company is meant to bring resources
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in convert those resources or capitals
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into financial capital and return them
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to a small group of shareholders then
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we're essentially concentrating capital
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into the hands of a few and that can be
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the definition of exacerbating
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inequality exacerbating inequality can
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have impacts on the company itself it
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can slow growth down it can make it more
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difficult to recruit and retain strong
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talent and a variety of other impacts so
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by exacerbating inequality by
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concentrating financial capital we might
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actually be dragging the business down
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shareholder expectations are changing as
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they understand the impacts the risks
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and the opportunities from
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sustainability legal precedent is
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supporting the relationship between
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shareholders and managers not as agents
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but as fiduciaries of one to the other
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the result is that sustainability is not
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only considered to be important around
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companies but we're starting to see how
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it is part of fiduciary responsibility
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itself the appropriate and the
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responsible fiduciary today almost has
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to consider sustainability aspects if
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you don't consider these material risks
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of environment and social aspects in the
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way that you are managing your company
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then you could be violating your
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fiduciary duty you could be violating
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your responsibility to shareholders to
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act with independent judgment on their
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behalf as beneficiaries
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