THEORY OF AGENCYTHEORY OF AGENCY

THE FINANCIAL ASPECTTHE FINANCIAL ASPECT

Monnier SophieMonnier Sophie

VOCABULARYVOCABULARY

Shareholder (actionnaire)Shareholder (actionnaire)

Manager= leader ( dirigeant, gestionnaire)Manager= leader ( dirigeant, gestionnaire)

Relaton of agencyRelaton of agency

Principle AgentPrinciple Agent

(shareholder)(shareholder) ( the contract)( the contract) (manager)(manager)

SUMMERYSUMMERY

I/ INTRODUCTIONI/ INTRODUCTION II/ DIVERGENCE OF INTERESTII/ DIVERGENCE OF INTEREST III/ ASYMETRY IN THE DISTRIBUTION III/ ASYMETRY IN THE DISTRIBUTION

OF INFORMATIONOF INFORMATION IV/ COSTS OF AGENCY IV/ COSTS OF AGENCY V/ CONLUSIONV/ CONLUSION

I/ INTRODUCTIONI/ INTRODUCTION

Definition: Definition: Mr Jenson and Meckling define a relation of Mr Jenson and Meckling define a relation of

agency « as a contract by which one or more agency « as a contract by which one or more peole ( the principle) commit another person peole ( the principle) commit another person (the agent) to achieve some services on their (the agent) to achieve some services on their name, implying a delegation of authority and name, implying a delegation of authority and power of decision to the agent.power of decision to the agent.

This theory rests on 2 hypothesis: the agent This theory rests on 2 hypothesis: the agent is supposed rational and opportunist too.is supposed rational and opportunist too.

II/ DIVERGENCE OF INTERESTII/ DIVERGENCE OF INTEREST

According to the theory, managers are the According to the theory, managers are the agents of the shareholders within the agents of the shareholders within the company.company.

Leaders and shareholders have differents Leaders and shareholders have differents functions of use in the firm, and act to functions of use in the firm, and act to maximize their respective interest.maximize their respective interest.

II/ DIVERGENCE OF INTEREST II/ DIVERGENCE OF INTEREST (2)(2)

Concerning manager:Concerning manager:Manager tends to appropriate a part of firm Manager tends to appropriate a part of firm

ressources in the form of privileges for his ressources in the form of privileges for his own consumption.own consumption.

Facts show the will of the leader to reinforce Facts show the will of the leader to reinforce his position at the head of the company.his position at the head of the company.

The leader try to maximize his wages and The leader try to maximize his wages and minimize his efforts.minimize his efforts.

III/ DIVERGENCE OF INTEREST III/ DIVERGENCE OF INTEREST (3)(3)

Concerning shareholder:Concerning shareholder:Shareholders had invested in the firm, so Shareholders had invested in the firm, so

they require to the leader to improve the they require to the leader to improve the turnover but particulary profitability.turnover but particulary profitability.

The touble is that shareholders can’t The touble is that shareholders can’t manage the firm for their own interest. manage the firm for their own interest. Right of vote in general assemblyis the Right of vote in general assemblyis the only one power that they can use to only one power that they can use to protect their interest.protect their interest.

III/ ASYMETRY IN THE III/ ASYMETRY IN THE DISTRIBUTION OF INFORMATIONDISTRIBUTION OF INFORMATION

The relation of agency exists only because The relation of agency exists only because the shareholder considers that the the shareholder considers that the manager is better placed to manage his manager is better placed to manage his goods. He recognizes that he have more goods. He recognizes that he have more ability and knowledges than him .ability and knowledges than him .

So shareholders must inspect, supervise to So shareholders must inspect, supervise to realize acts of the leader.realize acts of the leader.

IV/ COSTS OF AGENCYIV/ COSTS OF AGENCY

There are 3 types of costs:There are 3 types of costs: 1- The cost of supervision is supported by 1- The cost of supervision is supported by

shareholders in order to limit opportunist shareholders in order to limit opportunist behavior of the leader.behavior of the leader.

2- The cost of obligation is supported by 2- The cost of obligation is supported by the leader to put shareholders in the leader to put shareholders in confidence.confidence.

3- The cost of opportunity or « residual 3- The cost of opportunity or « residual loss » is supported by shareholders.loss » is supported by shareholders.

V/ CONCLUSIONV/ CONCLUSION

The relation of agency is a necessary theory The relation of agency is a necessary theory to understand firm’s mechanisms.to understand firm’s mechanisms.

Shareholders are owners of the company Shareholders are owners of the company and their interest is to receive dividends at and their interest is to receive dividends at the end of the year.the end of the year.

So, supervisions are essential to check acts So, supervisions are essential to check acts of leader to limit opportunist behavior.of leader to limit opportunist behavior.

To solve the problem of agency (divergence To solve the problem of agency (divergence of interest) they must set up a system of of interest) they must set up a system of motivation. ( stock option for exemple)motivation. ( stock option for exemple)