Wednesday, July 23, 2008

Agency Conflicts

Justin Fox offers a brief overview of some academic views on agency conflicts in this post, "The Social Responsibility of business is... what, again?". He concludes,

1) Having multiple organizational goals can be a recipe for underperformance and waste,


2) Focusing exclusively on a single, simple goal like profit maximization or shareholder value can lead an organization terribly astray [e.g., if corporate managers manipulate earnings or worse in pursuit of higher earnings and higher share prices].

One advantage of investing in small companies where the senior managers own significant stakes in their companies is that there are fewer agency conflicts. When the agents are also the biggest owners, the agents' interests are more closely aligned with those of their outside shareholders. One example is a company I've mentioned here a few times before, Alloy Steel International (AYSI.OB), where the CEO and the CFO together own more than 70% of the company's shares.

No comments: