Agency Theory What Activities Should Term Paper

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In extreme cases, managers might manipulate the price of stock to improve their own financial future, releasing falsely positive reports to net a gain, and then selling shares before the real truth about the company's poor financial health becomes known.

3. Finally what can be done to insure that we will have a greatly reduced probability of agency issues with the management of FF&F, Inc.

Linking pay to performance has been one popular way of remedying the problem of agency on an executive level. However, this is problematic to some degree, as outside factors can substantially impact short-term profitability. A bad manager might receive a bonus during times of economic boom, while a good manager instating needed reforms might oversee the company during a period of economic decline, or simply have to allow an initial loss to see a profit later on. Ensuring that managers are shareholders is another method of ensuring that the interests of the managers are in line with the company's interests, and therefore, shareholder's interests.

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However, there is always the danger of the CEO manipulating the company's apparent performance for his or her own interest, in that case.

There is no perfect method to ensure that agency issues do not exist. One thing shareholders can do, however, is to be vigilant about monitoring how the company is doing. Although this may sound obvious, in an era where many shareholders own mutual funds, and do not know where the funds are invested, or whose portfolios are themselves managed by outside agents in the form of brokers (who may likewise have their own agenda), critically and continually evaluating the company's financial data, and carefully reading management's statement of its vision of where the company will be in the future is essential. Ultimately, managers are the employees of shareholders both large and small, and shareholders must remember this fact.

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