Analysis of Organization Theory

Agency theory is one of the most important concepts of the business areas especially financial economics. Because of its importance, this theory is included in most of the introductory chapters of the modern financial economics books and publications. It is commonly cited among the key areas for improvement and improvement of the present day financial economics. Moreover, its assumptions provide wide explanations for important business areas such as: merger activities, dividend policies, capital structure, commercial restructuring, and executive compensations, etc. . .

Agency theory identifies the business or the organization as "nexus of contracts" between different source of information suppliers. It really is centralized on two different parties: principal, who provide you with the capital, and the agent who control the day to day businesses for the firm. In other words, it is the relation between person who determines the task and another who does the work. For instance, in businesses, principals will be the shareholders who delegates work to the agent which is the director in the business. Organization theory assumes that shareholders and managers are determined by their self applied -interest, thus managers will probably persist their self-interest goal that contradicts with the goals of the owner. However, agents are likely to work with the self-interest of the main. This turmoil results with a cost called the organization cost. This cost represents the expense of supervising the patterns of the realtors as well as the revenue loss caused by operating procedures and limitations on management. However the firm theory is controversial and contradictory, many scientist discussed this concept and discussed its benefits and drawbacks on many business areas' especially financial economics.

Many scientist and scholars talked about the firm theory, and it is one of the very most important theory in the monetary and financial history fields. This theory was originated and created by two scholars, Stephen Ross and Barry Mitnick. Each one experienced a have a area of the agency theory and created. Economic sensible, Stepeh Ross is the one in charge of the financial theory of agency, and financial smart, Barry Mitnick is in charge of the institutional theory of company. Both of these scholars used the same concepts but under different assumption. Everyone presented the theory in his own way or thinking. Ross introduces the organization theory from the side of problems of reimbursement relation as an incentive problem. On the other hand, Mitnick introduced how the institutions should evolve to cope with deficiencies that is established by the company relationships. Corresponding to Mitnick, "Behavior never occurs as it is recommended by the main because it does not pay to make it perfect. " This is the main problem that Mitnick suggest as a deficiency of the agency romantic relationship and he suggested that the society created rules and policies that help the companies to wait these imperfections, taking care of to deal with them, and adapting to them. Therefore, in order to comprehend the firm, people need both factors to see the incentive area as well as the organizational framework. However, this theory did not accurately described properly and launched to the planet until the initiation of Jensen and Meckling articles in 1976. Jensen and Meckling introduces the agency theory as a marriage problem that arises between the owner of the resources and the main one who is controlling those resources. More basic speaking, a issue can arise between one who owns the administrative centre and the one who is managing your day to day operation since every party has his own interest that wants to be achieved and those passions can be contradictory. Matching to Jensen and Meckling, "Agency cost arise from the conflict of interest between a principal and a realtor. " For instance, when professionals, who are accountable for decisions that impact the procedure of the organization, are not the principal beneficiary of the firm net assets, , nor accept any effect regarding his / her decisions. In addition, the organization cost is divided into three kind of cost: structuring cost, monitoring cost, and bonding cost. Structuring cost is the cost that a firm should take it when processing any product or service such as transaction cost, suck cost, and set cost. It is the preset cost divided by the adjustable cost. Monitoring cost is seeing and supervising the tracking of cost daily, every week, monthly, and annually. It is very important for the owner to possess mangers that allocate the correct time to the proper work and reduce cost just as much possible. Because of this problem, Jensen offers many solutions to save the organization out of this problem. Setting the utilization of agreement is a cost that the organization should use to be able to align the actions of the mangers with the activities of the owner. As Jensen (1994) suggests, "Managerial decisions designed to reinforce organizations often talk with opposition from colleagues, employees. . . providing professionals with incentives to bargain their decisions. " In other words, the best way to make sure that the decisions are not conflicting is to ensure that the trade-off that mangers face are moving them to take the right decisions. Therefore, the goal of the agent should boost the firm prosperity that lead to boost the performance and market price.

Moreover, in order the manager to increase value of the organization, the owner should create payment plan that result in the agent to spend his or her efforts or works to increase the firm earnings and productivity. Based on the organization theory, the shareholder should have the sense that offering a compensation package deal to the real estate agents can decrease the agency cost meaning interest of both parties will maintain the interest of the company as entire, and both get-togethers will be one team attempting to maximize the worthiness and the wealth of the business.

The organization theory creates many responsibilities that shareholders must consider to conserve their organization. The organization cost is one of the assumption that is created in order to show the types of expenses that the company should spend. It really is split into three types: expenses to monitor managerial activities such as audit cost. Nowadays, auditing becomes one of the most important business issues that every corporation especially the bank sector should apply. For example, due the firm problem, the Lebanese central lender oblige all the banking sector to have two self-employed big four auditors in order to assure all the financial information that is created by the professionals. The next cost is the expense of structuring the business such as appointing outside the house customers to the panel of directors or reengineering the organizational graph in the organization. To have a well design group charts in a firm is very effective since it can help to allocate the careers in a manner that can improve efficiency and be rid of connection problems. The third cost is the opportunity cost that is established by the dog owner such as voting in specific issues and limit the ability of the managers regarding the actions that advance the shareholder prosperity. For this function, many system are unveiled to the business world that can decrease those costs and solve the agency problems. First, settlement plan can be employed for the mangers such owning a stock in the organization and stock price changes. In this case, managers I appreciated to work effectively for the sake to improve the financial wealth to increase his or her stock value. Another extreme, is to have in the organization stockholders which have a theory X management style which means that they will manage each step or decision that is taken by the managers, but this would be costly and inefficient. The very best solution to have a compensation that is dependant on performance and some monitoring should be undertaken. Moreover, the dog owner can create a feeling for professionals that if indeed they make any wrong decision that have an effect on the firm negatively, they will be fired or changed by another director. However, this solution is somehow high-risk in a case that creates problems in the workplace. For instance, many publicly traded companies are creating stocks based on performance levels that are shared given for the mangers predicated on performance that happen to be discussed by many financial measures such as earing per show, return on property, and come back on equity etc. . . In case the performance is below the level, the shares will be significantly less than completely. These incentives are created for just two main goals. First, they give executives to do this that will increase shareholder prosperity. Second, these kind of programs help the company to retrain professionals that can have self-assurance to risk their financial prosperity predicated on their skills which can result in better performance.

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