Agency Problem in Corporate Governance
An agency problem in corporate governance is large institutional shareholders who tend to support management.3 min read
2. Causes of Agency Problems in Corporate Governance
3. Examples of Agency Problems
4. Blockchain Solutions for Agency Problems
An agency problem in corporate governance is large institutional shareholders who tend to support management. This leads to little democracy in voting and absences in annual meetings. Activists and trade-union shareholders are those who attend the meetings and give an incentive to corporate managers to not take meetings seriously.
Agency Problems in Corporate Governance
Meetings are more than likely held by groups with their own interests, used by management as a way to avoid reforms that make them more accountable like a vote on the executive pay.
One important reason institutional shareholders are not interested is because they are looking for short-term gains, even though being good owners would help the company in the long-term.
Some issues with corporate governance include high pay for CEO's, executives picking directors, and indirect resistance to regulations. The CEO pay is not equal to their value to the company. Board members may get too comfortable in their positions. Financial matters are not transparent and directors are selected without a majority vote.
Causes of Agency Problems in Corporate Governance
The modern corporation was created as a response to regulation and not as an advantage to the company or shareholders. The board of director structure is not equal to the essence of a corporation, as the company doesn't need the directors to continue its operations.
The agency costs don't have a positive impact on corporate governance in many countries. Corporate governance mechanisms are used in various degrees in different countries. Corporate governance risk and agency costs are obvious in the non-finance sector.
Examples of Agency Problems
- Enron Fall - The fall of the energy giant in 2001 showed the world how an agency problem arises. The company's chairman Kenneth Lay, the CFO, and CEO Jeffrey Skilling were selling shares based on false accounting reports which made it seem as though the stock was more valuable. Many stockholders lost millions as the value of Enron shares plummeted.
- Real Estate Bubble and Goldman Sachs - When financial analysts invest against the interests of their clients, it's another agency problem. Goldman Sachs and other agencies created debt obligations and sold them short, with the thought that the mortgages would be foreclosed. In 2008, when the housing bubble occurred the short sellers made millions and many people including homeowners lost money.
- Boeing Buyback - During 1998 to 2001, Boeing had about 130,000 shareholders, and most were employees who bought stock through their retirement plans. Boeing was buying back the stock which drove prices lower. The executive actions damaged the employees' retirement account value.
- WorldCom and Executive Pay - In 2001, CEO Bernard Ebbers took out $400 million in loans at a rate of interest of 2.15 percent. The company didn't report this in its annual report. The news of the accounting scandal came out later that year, and the company took on debt to pay its executive.
Blockchain Solutions for Agency Problems
Blockchain technology allows for the non-existence of internal and external monitoring that is necessary in corporate governance. The technology allows for guarantees to build trust to overcome agency problems. It's easier for a company to be efficient by lowering agency costs and relationship.
Blockchain offers solutions to agency problems by moving former supervisor tasks to a decentralized computer network that is not depended on human mistake or greed. Blockchain eliminates agency costs such as supervising agents by creating a trusting relationship between the agent and the principal.
The participating principals and agents will have guarantees that directly address corporate governance problems. Given the blockchain guarantees, this kind of technology allows for a different solution to agency problems.
Blockchain and its security system are immutable, which creates trust between the parties in their contractual relationship. Therefore, no party can bend the rules in the blockchain code. The principal has no reason to monitor agency costs since blockchain addresses the agency problems in corporate governance.
Agency governance continues without intermediaries in the blockchain such as principal control, third-party risk, and intermediaries, as well as market performance and private investors. Controls and verifications, including regular meeting with shareholders, finance disclosures, financial press, and hedge fund investors, are no longer needed in the blockchain.
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