PART 1. APPLIED CORPORATE FINANCE
CHAPTER 1. Corporate governance. Agent conflict
1.1. Maximizing the value of equity, agency conflict and agency costs
Corporate finance. Science and practice, called the capacious word "finance", is very diverse. This area of personal finance, studying the laws and technologies of money management of individuals and families, and the scope of public (public) finance, and management finance, covering the problems of making financial decisions in business (ie in firms of any organizational and legal form). A special component of managerial finance, which attracts the greatest attention of scientists and practitioners from all over the world, is corporate finance, or corporate finance, which in general terms can be defined as a science that studies the regularities, methods, and technologies of financial justification for strategic decisions in corporations.
Corporation is a form of business organization that has the following main features:
o is a separate legal entity;
about the owners of this legal entity are equity investors - shareholders;
o shareholders have limited liability (do not meet the corporate debt with their property);
o functions of the current controls are delegated to hired managers under the control of the board of directors
o title of shareholders' property - an action that has the property transferability, ie. can be sold (transferred) by one person to another.
Thus, the essence of the corporation is the shared ownership of its participants, and its main goal is to maximize the capital of owners (shareholders).
However, equity participants (owners, shareholders) are not always able to properly manage the assets of the corporation. Moreover, the logical stage in the development of a successful business is the transition of management functions to professional managers.
The role of professional managers. Formally, the main body of corporate governance is the general meeting of shareholders. And the main issues of the development strategy of the joint-stock company remain in its exclusive competence (organization, liquidation, reorganization, payment of annual dividends, election of the board of directors, etc.). However, the functions of the current management as the corporation develops are increasingly concentrated in the hands of professional managers (managers) working for hire.
Executive bodies of the corporation management. Management is represented in the corporation by the executive management body, whose competence includes all matters of practical implementation of the current activities of the company, with the exception of those referred to the exclusive competence of the general meeting of shareholders. In other words, the executive body organizes the implementation of decisions of the owners of the company. The sole executive body of the company (director, general director) acts without a power of attorney on behalf of the company, commits transactions on behalf of the corporation, approves the states, issues orders and gives instructions binding on all members of the society.
The collegial management body (board, management) is convened with a certain periodicity, takes collegial decisions, also relevant to the current management. Between its members there is a corresponding distribution of authority for the current management of the company.
Agent conflict. In theory, managers, being agents of company owners, should strive to maximize the wealth of shareholders. However, in reality they can be more concerned with their own well-being. According to S. Myers (1987), the main priorities of managers in practice are:
o material compensation;
o privileges (intangible benefits: working conditions, vehicles, influence in the broad sense of the word);
o stability of position.
Therefore, instead of the behavior aimed at maximizing the wealth of shareholders, managers can limit themselves to satisfying behavior, ie. to fulfill only the necessary minimum conditions for shareholders to maintain their stable position, but not to strive for maximum enrichment of the owners.
Agency costs and moral problem. Accordingly, owners who do not receive return, bear direct and imputed costs. By sources of origin, they can be divided into four groups:
1) satisfaction of one's own interests. This group includes costs, the reason of which is the satisfaction of managers with their own interests at the expense of shareholders. This includes the following items:
o Over-consumption - excessive representation expenses, collecting art works, membership in elite clubs at the expense of the company, use of vehicles not for their intended purpose, etc.
o financing of political parties if top management has political ambitions that are not related to corporate development;
o placing orders of the company among firms that are friendly to top management, in which managers have direct or prospective interest;
o theft and insider trading - the purchase by companies under management control of the company's assets at a price below the market, the trade in insider (confidential) information relating to the company;
o resisting takeovers threatening management, by profitable shareholders of the company;
2) rejection of profitable projects for the company. In addition to direct costs, the activities of managers can bring imputed costs to shareholders, including missed opportunities to implement projects profitable for shareholders, but disadvantageous to managers. The reasons can be different.
For example, managers understand that the bulk of the project's design period falls on the time of their authority; as a result, this period will be burdened by high costs and efforts. Monetary inflows of the project are expected in the future, when these managers can already re-elect. And managers can choose several years of "quiet life", during which their term of office will end, and they will retire. And the next generation of managers will face unresolved problems and moral obsolescence of existing assets in the enterprise.
Another reason for abandoning a profitable project is that managers may feel less confident in the new area of activity to which the project belongs. Fearing for their authority and influence, they will prefer the old and possibly outdated technologies, where they feel themselves experts, new, revolutionary ideas;
3) acceptance of unprofitable projects.
The appearance of such projects may be caused by the reluctance to pay dividends and the desire to maximize the capital under the management of the manager, which strengthens his personal influence.
In some cases, managers tend to invest in risky projects, if the company is in desperate position because of their activities. Such investments in these conditions give an illusory chance to correct the existing situation. For their own reasons, these projects are close to the impulse of the loser to put on the stake "family diamond" against lost pants.
In addition, the parameters of obsolete projects can be embellished by managers, because these projects can be in the sphere of their professional competence;
4) an unjustified distribution of effort. Another source of agency costs - an unjustified distribution of efforts in the implementation of the current management. In the known Parkinson & apos; laws talked about managers hopeless an organization that at a certain stage of bureaucratization spends all its efforts on training staff, picking on trifles, instead of solving strategic problems of survival. Indeed, it is easier (and for some, more pleasant) to force subordinates to observe the rules of the working day until a minute, than to inspire their creative activity. Such activities of managers often destroy the value of the company.
The agency costs do not include losses associated with the incompetence of managers. In all these cases, the source of agency costs was the conflict of interests of managers and owners of the company (agent conflict).
Two sources of softening of agency conflict. There are two potential sources for mitigating agency conflict:
o creation of schemes for the remuneration of managers aimed at maximizing the value of shareholders' equity;
o creation and use of a mechanism for monitoring the activities of managers, again aimed at fulfilling the interests of owners. Part of this mechanism is due to the developed market relations, the other part needs to be developed at the level of corporate leadership.
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