? If people have no faith, I don?t know what they are good for. Can a vehicle travel without a link to a source of power?? Confucius
Agency problem is a worldwide problem wherever it is in western countries or China. It is inevitable during the development of the firm?s organization. As long as the interests between the owner and management are not aligned, the conflict is existed. Many western firms have established the rules and incentive systems to prevent ?agency problem?. Somehow it works. We find it is not enough to overcome the problem. China has undergone a long period economic reform. During the reform, how to improve the SOEs performance is a hot focus. In the past, all the SOEs were controlled by the government, what the companies? doing were decided by the government, then on one side the executives did not take the full responsibility for the company; on the other side, the officer blamed the managers for the bad performance. There are no clear boundary on the space of freedom and responsibilities. (see Georges Enderle) The ?agency problem? became even worse because of this phenomenon. Now China has tried a lot of methods to establish the modern organization of SOEs. The boundary between the government and the executives of SOEs has been clearly set. Some SOES have been published. However we find that the ?agency problem? still exist more or less and the business ethics do be involved. And business ethics can play a virtually important role in dealing with the ?agency problem during the economic reform. Before we go further, we need to define what is agent and what is agency problem. Agent is the entity where Management represents owners; the agency relationship is the relationship between the principal and the agent, in which the agency acts for the principal. And what is agency problem? The agency problem results from the separation of management and the ownership of the firm. Agency problem can be clarified as the followings: Agents may consume excessive perks. Agents may shirk (not expend their best efforts).
The Essay on Agency Problems
Similar problems can arise between ordinary and preference shareholders, and between senior and junior creditors in bankruptcy (when creditors are the effective owners of the firm). The third agency problem involves the conflict between the firm itself—including, particularly, its owners—and the other parties with whom the firm contracts, such as creditors, employees, and customers. Here the ...
Agents may act in their best interest (instead of the interest of the principal).
3. Why does ?Agency Problem? happen? On the very beginning, most firms were based on the family and their management was the members within the family, and there was not agency problem at all, because the management and ownership were aligned, no interest conflict. As the firms grow, it seems they need high management skills and the existed relationship within the management restricted the growth of the firms. Furthermore, it was much more difficult to raise new equity. Then they hired the professional managers to act as the owners. The agency problem is followed as this organization comes out. Due to the interest is not alignment between the managers and the owners, more or less the managers will pursuit their own profit instead of the owners, which we thought is unethical because of the space of freedom and responsibility are not matched. (see Georges Enderle) and we will discuss later. Although the goal of the firm is the maximization of shareholder?s wealth, in reality the agency problem may interfere with the implementation of this goal. The agency problem results from the separation of management and the ownership of the firm. For example, a firm maybe runs by the professional managers who have little or no ownership in the firm. Because of this separation of the decision-makers and owners, managers may make decisions that are not in line with the goal of maximization of shareholder wealth. They may approach work less energetically and attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders. The cost of ?Agency problem? is obvious. There are the monitoring costs, bonding costs and the residual loss. Monitoring costs are costs incurred by the principle to monitor the actions of the agents (Ex. Annual report to shareholders).
The Essay on Process Of Decision Making Manager Problem Information
No 1 > 1- -6-99/2... No No 2 > 2000. : 2000. 2000. No 1. , : much, many, few, little... Did it cost much to repair the car He isn't very popular. He has few friends... The museum was very crowded. There were too many people... The weather has been very dry recently. We " ve had little rain... No 2. , : some, any... When you come to Moscow, yo can meet me any time. , . With the special ...
Bonding costs are costs incurred by the agent to ensure they will act in the best interests of the principals (binding employment contract).
The residual loss is the implicit cost when management and shareholders? interests cannot be aligned, even when bonding and monitoring costs are incurred. We will spend considerable time in monitoring managers and trying to align their interests with shareholders. Managers can be monitored by auditing financial statements and bonded by managers? compensation packages. The interests of managers and shareholders can be aligned by establishing management stock options, bonuses, and perquisites that are directly tired to how closely their decisions coincide with the interest of shareholders. The agency problem will persist unless an incentive structures set up that aligns the interests of managers and shareholders. In other words, what is good for shareholders must also be good for managers. If that is not the case, managers will make decisions in their best interest rather than maximizing shareholder wealth. 4. Does incentives or regulations eliminate the ? Agency Problem?? A high level of compensation can result from a pay-for-performance system in which the executive has performed extremely well, or it can be the result of the agency problem, Where the executive is taking advantage of the system.
Keep in mind that an executive compensation committee, appointed by the firm?s board of directors, generally recommends the CEO?s compensation package. Also keep in mind the board of directors, although elected by the shareholders, is generally nominated for election by the CEO and thus may be more sympathetic to the CEO?s desires than to the shareholders? best interests. This opens the door for ? good old boy? networks to take care of their own and set up a compensation package that rewards, regardless of performance, without attempting to align managers? and shareholders? interests. So it is essential to establish a good controlling and monitoring system, but since it does not work so well or we have not find a perfect mechanical system to prevent it up to now. How should we do then? It is the ethical behavior that ? doing the right thing?. A difficulty arises, however, in attempting to define ?doing the right thing?. The problem is that each of us has his or her own set of values, which forms the basis for our personal judgments about what is the right thing to do. Every society adopts a set of rules or laws that prescribe what it believes to be ? doing the right thing.? In a sense, we can think of laws as a set of rules that reflect the values of the society as a whole, as they have evolved.
The Term Paper on Analysis of statement that “acquiring foreign companies creates shareholder wealth and helps reduce many risks”
The above statement discusses risk reduction as a benefit of acquisitions. I will split the statement into two parts; one that discusses the reduction of risks through acquisitions, and the other which explains the creation of shareholder wealth through acquisitions. The first part of this statement can be explained through the various forms of risk that are reduced due to acquisitions. One ...
However, not all the ?agency problem? has been against the law. As the individuals, they have a right to disagree about what constitutes ?doing the right thing? and we will seldom venture beyond the basic notion that ethical conduct involves abiding by society?s rules. And some of the ethical dilemmas that have arisen with regard to the ? agency problem?. These dilemmas generally arise when some individual behavior is ground to be at odds with the wishes of a large portion of the population, even though the behavior is not prohibited within law. Ethical dilemmas can therefore provide a catalyst for discussion. ? Is ethics really relevant?? the answer is ?Yes.? First, although business errors can be forgiven, ethical errors tend to end careers and terminate future opportunities. Because unethical behavior eliminates trust, and without trust businesses can not interact. Second, the most damaging event a business can experience is a loss of the public?s confidence in its ethical standards. 5. The agency problems in SOES do involve business ethics dimension. By the definition of the ?agency problem? in the SOEs in China, the managers assigned or appointed are the agents, who manage the assets of the principal.(the country) They have a lot of authorities regarding personnel, funds and fixed assets etc., but they don?t have the corresponding responsibilities.
The situation is a result of the mismatch of the space of freedom and responsibility as indicated by Georges Enderle. According to what Prof. Georges Enderle said, the space of freedom and responsibility should match with each other. On one hand, it is unfair for someone to be held responsible for something if he or she doesn?t have the freedom to make decision on it. On the other hand, it will be dangerous for someone to only enjoy the space of freedom without any or less constraints or responsibility. Sooner or later, he or she will abuse the authority to achieve for his or her own interests by hurting others. During the reform of the SOEs organization, the managers are granted with even more authorities for them to better manage their companies. But unfortunately, some managers undertake some unethical or even illegal activities to act against their companies and the country, which has caused a huge loss for our country. It was reported that total lost assets of the country amounted to about RMB 50 billion to 100 billion during the 1990?s. The main reasons are that the managers of the SOES take advantages of their prevailed positions to gain personal interests for themselves.
The Term Paper on Evaluating a Business Code of Ethics
Businesses in today’s society share a purpose, a vision, that relates philosophy and principles of ethics to better meet the needs of the organization and stakeholders, including customers, employees, shareholders, suppliers, and communities. Without professional ethics, businesses and its programs would not have the ability to be successful. This paper will examine Humana, its business code of ...
But they don?t really worry about the loss because they will not be responsible for that. Please read the following case: XXX Company is one of the largest SOES in Guizhou Province. Started from the 1980?s, the company went into a very difficult situation, making a greater loss every year. Oct. 27, 1999, an extremely shocking news exploded the company: Guifang Jing, the 54-year old, female financial manager were involved in corruption of over RMB7 million. Very soon, she confessed that it was she that took advantage of her position and her professional knowledge to manipulate the financial statements and embezzle the company?s assets. At the beginning, she got involved in the bank accounts transaction directly by using as excuse that the cashier was not familiar with it. She hid 325 bank accounts in total, which amounted to RMB 57 billion in total. At the meantime, she played a lot of tricks in distorting the bank checks and gained RMB12 billion in total. After she embezzled so much money, she started to have an abnormal mentality. One time, when she found that the company still had some cash balance in the bank, she felt very sorry for not having taking out for herself?. One day when she was on the business trip, one financial clerk of the company found that one bank check of several ten thousand RMB was missing and he reported to the general manager and the latter reported to the police.
The Term Paper on Business Ethics and Issues
Ethics Ethics is a branch of philosophy which seeks to find answers about the moral concepts like bad, good, evil, right, wrong, etc. According to OEC (2011) ethic is defined as “a moral philosophy which is concerned with what is right or wrong, good or bad, fair or unfair, responsible or irresponsible, obligatory or permissible, praiseworthy or blameworthy”. Many scholars have associated it with ...
Guifang Jing smelt that the police would start investigate very soon. After pondering over for several nights, she eventually recovered her conscience and decided to give herself to the police. Let?s analyze the case. It is true that she broke the law. But if her business ethics had been good enough, she would have not got involved in such illegal and unethical behavior. She was assigned and trusted by the shareholder to have the authority to manage the company assets, but she betrayed her company by abusing her space of freedom, especially when the company was in such a difficult situation. At that time she should have used her professional knowledge and cooperated with her colleagues to improve the financial performance of the company. Another reason was that there was no healthy corporate culture in the company. Employees were not encouraged and rewarded for making contributions to the company. So nobody really cared about the company. That kind of environment gave Guifang Jing opportunities to corrupt such a great amount of money. Upon knowing that the police would investigate the missing bank check, she decided to confess to the police to avoid more serious punishment. Actually, she was at the first stage of Konhlber-Inspired Typology of Ethical Dilemmas.
If she had been in a higher stage, for instance, Stage 4 Conform to rules, laws, code, and conventions, or even higher, Stage 5 Follow principles based on respect for people and their rights, she would have not got involved to this crime. But we must be clear that the case of Guifang Jing was only one of the similar cases that happened in the SOEs in the country. Obviously the companies and the whole country need to take action to improve the business ethics, to foster a good and ethical business environment. So far, we have understood why the incentives and regulations cannot and will not solve the agency problems. The agency problems do involve business ethics dimension. Then there is a base for business ethics to play an important role in dealing with the agency problems. As common sense, human acquires knowledge through education, formal or informal. Without education (in a broad sense), people cannot understand the nature and the society. They won?t have their values developed in the process of learning and practice. Of course, they won?t act according to the social behavior orders and norms. Business ethics aims to discuss the business conduct/activities that raise moral issues and to improve ?the ethical quality of decision-making process at all levels?: micro-, meso-, and macro-level (Enderle) through education.
The Essay on Business Ethics Across Cultures Article Review
Business Ethics Across Cultures Article Review February 24th, 2013 Egypt is a country that is in Africa that is the center for many of the Islamist movements that is going on right now in the Middle East. There is a movement that is going on right now that is called the piety movement it is based on some political implications that could come about that would bring about change. This change would ...
6.How to solve the ?Agency problem? from the view of business ethics in the ?three levels?(Georges Enderle)? The country should try to enhance the efforts to improve business ethics education. According to Prof. Lu Xiaohe, ?the business ethics in China has emerged and developed mainly as a response to the demonic reforms in three stages: (1) 1978-1984; (2) 1984-1994; (3) 1994 to the present.? That means the business ethics has just been talked about and studied. This is the actual need when the SOEs are in the intermediate state of the reform of the corporation organization. During this particular period, our country should put even more efforts to enhance business ethics education in all the SOEs and business schools. Just as our Premier Zhu Rongji says, ? The success of SOEs hinges on the quality of the managers. If SOEs want to survive and develop in the severe market competition, they must develop a team consisting of managers who have high ethical standards, are good at managing business, have business acumen, and are brave to pioneer.? By having the business ethics programs for the managers in the SOEs, they will improve their ethical reasoning sense and ability, distinguish what they ought to do from what they ought not to do.
When they make decisions about the company, they will integrate the business ethical dimension in the economic efficiency. Obviously, when they encounter the dilemma where their personal and the organizational interests conflict with each other, that is, some agency problems, they will also measure their decisions according to the ethical values developed by the education. The business major students, the future managers, should not only learn how to improve the profits and efficiency for the organizations but also how to make ethical business decisions. Meanwhile, the public media should play an active role in fostering the social environment in which business people should try to act in an ethical way. By advocating the good models and condemning the bad one, the public will develop a strong sense of business ethics. But we don?t mean we can ignore establishing the regulations and other kinds of systems for trying to solve the agency problems. They will help our country to select good managers to assign to the SOEs, and monitor and control the performance. Instead, we emphasize that we should try to carry out the both hands and the both should be strong. The SOES should try to develop and foster a good and healthy corporate culture that the company?s interests should be put in the first priority.
Nobody can bypass the companies to seek personal gain for itself. All the employees should be encouraged to participate in the management of the company. Every manager in the company will be under the supervision of all the employees. Once any unethical behavior is discovered, the actor will be condemned by all the employees and public. What happened in the YYY SOES in Shanxi Province was a good example. When the warehouse keeper of this SOES found that the over RMB 200 thousand was missing during the evaluation of the company assets before transforming to corporation limited, she reported to the local government. Although the investigation indicated that there were no problems, she believed that the results were wrong and some people cheated in the investigation. She chose to suicide to fight against the corruption. Fortunately, she was saved. The second time investigation proved that she was right. If everyone or most people have such strong ethical levels, we would not have some many and serious problems. Meanwhile, the SOES can also resort to other means to improve the business ethics levels of their managers, such as inviting famous business ethics professors to have training programs, or sending their managers to some famous business school in China to attend business ethics courses.
The managers of the SOES should continuously improve their ethical standards by self-teaching. This is the call and need from the current society. If they want to be successful in their career with the SOES, actually, the same as with other types of organizations. Our Premier Zhu Rongji emphasizes, ?The managers should be happy to learn, diligent to learn, and good at learning.? As Chinese, we should feel lucky that we have a very long history and a lot of famous philosophers who left us so great valuable culture legacy that we can always find something inspiring even for the modern business management. In Lun Yu, Confucius said, ?If people have no faith, I don?t know what they are good for. Can a vehicle travel without a link to a source of power?? How vivid is this metaphor? Upon agreeing to take the management positions in the SOES, managers should keep the faith to the country, to the company and to all the employees. They should not betray any of them, or they will not go further. The famous ancient military scientist Sunwu said in his famous work, The Art of War, ?The generals should have five basic qualities: wisdom, sincerity, benevolence, courage, and strictness.? As the business managers, they also should have similar qualities to win the business war in the market competition. There are numerous examples in Tao Te Ching, too. In a broader sense, Chinese traditional ethics about ?Yi? and ?Li? also gives us a kind of guidance. ??Li? means benefits and profits and ?Yi? refers to the principle or norms of obtaining and distributing benefits or profits? (Lu Xiaohe).
Speaking about the specific agency problems, managers should observe the ancient doctrine that is still acceptable and applicable in the modern business world. Along with the opening policy, we have a lot of opportunities to exchange ideas with foreigners in many different aspects including business ethics. Now we can find some translated books on business ethics. Also it is easy for us to access the Internet to read the relevant articles and research results from abroad. The managers as individuals can and should try to improve themselves. The essential question should not be ?What should the other individuals, companies and the national economies do??; but rather ?what should I personally do, and what should the company and the national economies to which I belong do in order to perceive and carry out the ethical responsibility at the different levels of acting.? In summary, business ethics can play an important role in solving the agency problem through the efforts taken in the three different levels. Nowadays, firms have to recruit management talents from outside, who are not owners, to compete in this more and more globalized economy. As long as the firms were to be managed by the agent, agency problem will exist.
If they are not dealt with carefully, they will cause huge loss for the owners. In the SOEs in China, the managers, the agents are working for the country, which is the owner and principal. So the agency problems are unavoidable. Although regulations and supervision systems are critical to solve the agency problems, they can not and will not eliminate the problems thoroughly. The ethical reasoning ability and ethical level of the managers of the SOES are also very important to reduce the possibilities of the agency problems. Especially, we need to put a lot of emphasis on improving the ethical quality of the managers at the same time to reform the corporation organization of SOES in China. Because the current system is out of date, cannot meet the requirement of the market economy in China, and not strong and effective enough to control and supervise the behaviors of the managers of SOEs. Through the efforts of strengthening education and the wide publication of the business ethics in three different levels, the macro-, meso-, and micro-level, the ethical awareness and reasoning ability of the managers will certainly be improved. That will contribute to solving the agency problem in the SOEs in China. Sun T. and Yuan S.B. (translator) 1997. The Art of War. Foreign Language Teaching and Study Press. Enderle, G. 2000. Business Ethics. Blackwell Companion to Philosophy. Lu, X.H. 1997. Business Ethics in China. Journal of Business Ethics (Netherlands) 16: 1509-1518 Snell, R. Psychic Prisoners? Managers Facing Ethical Dilemmas: Cases from Hong Kong http://news.sohu.com/20000920/file/000,000,100390.html
Bibliography:
Students of The China Europe international business school
