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Activity 1 Direction

Activity 1 Direction: Explain each question, before you begin writing, read the passage carefully and plan what you will say. Your essay should be as well organized and as carefully written as you can make it. Read carefully, reflect on and record your responses to the following questions.

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patricia anne dela cruz
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27 views2 pages

Activity 1 Direction

Activity 1 Direction: Explain each question, before you begin writing, read the passage carefully and plan what you will say. Your essay should be as well organized and as carefully written as you can make it. Read carefully, reflect on and record your responses to the following questions.

Uploaded by

patricia anne dela cruz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Activity 1 Direction: Explain each question, before you begin writing, read the passage

carefully and plan what you will say. Your essay should be as well organized and as
carefully written as you can make it. Read carefully, reflect on and record your
responses to the following questions.
1. What are the effects of agency in governance?
Agency is used to understand the relationships between agents and principals.
The agent represents the principal in a particular business transaction and is
expected to represent the best interests of the principal without regard for self-
interest. The different interests of principals and agents may become a source of
conflict, as some agents may not perfectly act in the principal's best interests.
The resulting miscommunication and disagreement may result in various
problems and discord within companies. Incompatible desires may drive a wedge
between each stakeholder and cause inefficiencies and financial losses. This
leads to the principal-agent problem.
Governance can be used to change the rules under which the agent operates
and restore the principal's interests. The principal, by employing the agent to
represent the principal's interests, must overcome a lack of information about the
agent's performance of the task. Agents must have incentives encouraging them
to act in unison with the principal's interests. Agency theory may be used to
design these incentives appropriately by considering what interests motivate the
agent to act. Incentives encouraging the wrong behavior must be removed, and
rules discouraging moral hazard must be in place. Understanding the
mechanisms that create problems helps businesses develop better corporate
policy. To determine whether or not an agent acts in their principal's best interest,
the standard of "agency loss" has emerged as a commonly used metric. Strictly
defined, agency loss is the difference between the optimal results for the
principal and the consequences of the agent's behavior. For example, when an
agent routinely performs with the principal's best interest in mind, agency loss is
zero. But the further an agent's actions diverge from the principal's best interests,
the greater the agency loss becomes.
2. What are the fundamentals objectives of corporate governance?
Contribute to improved corporate performance and accountability in creating
long-term shareholder value. Control the controllers by increasing the amount of
reporting and disclosure to all stockholders. Increase level of confidence and
transparency in company activities for all investors existing, potential and thus
promote growth. Ensure that the company is run in a legal and ethical manner.
Build in control at the top that will cascade down the organization.
We have the key concept of the foundation to governance is the action of the
individual.
Fairness- sense of even-handedness in dealing with external stakeholders.
Openness/transparency- the creation of a transparent relationship with
shareholders to reduce agency costs (see later in this chapter), and the
development of accounting systems and standards to facilitate this openness.
Independence- from personal influence of senior management for non-executive
directors (NEDs). Independence of the board from operational involvement.
Probity/honesty- Honesty in financial/positional reporting.
Perception of honesty of the finance from internal and external stakeholders.

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