CHAPTER 5

AGENCY PROBLEMS AND

ACCOUNTABILITY OF
CORPORATE MANAGERS
AND SHAREHOLDERS
MARCELINO, ARCHIVAL, ADOLFO & CATARUNGAN
 OBJECTIVES
Enumerate and explain the principal-agent
specific issues.
Enumerate and elaborate the identified
agency problems in corporate governance.
Ascertain the significant differences among
the types of takeovers.
Identify the external forces affecting
governance.
 8 Outrageous Executives Perks

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 8 Outrageous Executives Perks

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 8 Outrageous Executives Perks

Super Security Box Seats 'Till Death

 Introduction
The debate over corporate social responsibility is often vague or unrealistic or both. The
participants speak in terms of how corporations ought to be run without specifying the
legal changes that will produce these results. When social responsibility advocates
recommend legal fixes, they typically focus on their aspirations for how these changes
will function without fully analyzing how the proposals will actually operate in the
context of real world constraints on governing large firms.

The relevant legal issues for corporate social responsibility concern whether and to what
extent legal rules should mandate or restrict mechanisms of corporate governance in
order to ensure that corporate managers act in society's interests rather than those solely
of the shareholders. It is helpful to begin the analysis by delineating what the relevant
questions do not concern.
 AGENCY PROBLEM IN
CORPORATE GOVERNANCE

Agency theory suggests that the firm can be viewed as a

loosely defined contract between resource providers
and the resource controllers. It is a relationship that
came into being occasioned by the existence of one or
more individuals called principals, employ one or more
other individuals, called agents, to carry out some
service and then entrust decision-making rights to the
agents.
 PRINCIPAL-AGENT SPECIFIC
ISSUES
Diversification vs Dividends
Control on how the available funds will be used or invested.
Managerial Opportunism
This creates a conflict of interest, with self-serving managers
making decisions that benefit them rather than the company
owners or shareholders.
Power Supremacy vs. Technical
Expertise
Some of the corporate investors are just putting
their money withexpectation of dividend at a
certain time.

Trust
Shareholders have more trust than doubts to
the agent.
 IDENTIFIED AGENCY
PROBLEM
Adverse Selection
The insufficiency of information that is normally
obtainable to the principal and to the agents.
Agency Costs
These activities include reports, observation
visits, supervision and third party assurance like
compliance audit and expert financial audit.
 Conflict of interest
This occurs when a corporation or person becomes
unreliable because of a clash between personal and
professional affairs.
Legal Requirements Vs. Opportunistic
Behavior
Opportunism and excessively paid executives and
managers in an organization leads to an ineffectiveness of
principal-agent relationship.
Self-Interested Behavior
Executives and managers will seek to make the most out of
their own value at the expense of corporate shareholders.
Proxy Voting
Refers to an exercise of voting in behalf of
shareholders through the use of a special authority given
by the shareholder/principal.
Benefits of Proxy Voting
The following are the areas where proxy system
accrues benefit to the principal/shareholder more
especially if the proxy is a fund manager:
Routine Decisions
Governance
Issues on Anti-Takeover
Derivative Suit
It s a lawsuit filed by a shareholder in behalf of the
corporation against a third party.
Specific Feature
Shareholders are the owners of the corporation but for
practical reasons, they are not empowered to manage the
day-to-day operations and other routinely concerns.
Process
The shareholder may be required to meet some a
qualifications such as minimum value of his holdings.
Takeover
Corporate takeover is the <general term referring to transfer
of control of a firm from one group of shareholders to
another.
 TAKEOVER
Corporate takeover is the
"general term referring to
transfer of control of a firm
from one group of
shareholders to another
group of shareholders.
 TYPES OF TAKEOVER
FRIENDLY TAKEOVER
- Before a bidder company makes an offer for another
company, it usually inform first the board of directors of the
company to be taken over.
HOSTILE TAKEOVER
- A hostile takeover permits the "acquirer to be" company to
bypass the target company's management if it is uncooperative and
unwilling to agree to a merger or takeover.
A Hostile takeover can be done in several ways, the
following are some of these:
1. By making a tender offer whereby the acquiring company makes a public
offer the price of which is way higher than the current market price making
it hard for the existing shareholders to resist.
2. By engaging into a proxy fight whereby the acquiring company persuades
enough shareholders, usually a simple majority is sufficient, to replace the
management with a new one. This new management will be installed
purposively to approve the takeover.
3. Another is by quietly purchasing enough stock in the open market, known
as a "creeping". The purpose of this is to gather enough holdings that can
somehow influence the decisions within the corporation. A 20%
shareholding is already significant enough for one voice to be heard and
influence management.
 REVERSE TAKEOVER
- Reverse takeover (RTO) is a type of merger used by private
companies to become publicly-traded without passing through an
initial public offering (IPO).
TENDER OFFERS
- A tender offer is a corporate finance term which means a type
of takeover proposal that is public and open invitation, usually
coursed through media by a prospective acquirer to all stockholders
of a publicly-traded corporation ("acquired to be") which is the target
corporation.
FINANCING TAKEOVER

Is an act of funding for the purpose of

obtaining control over a corporation
through purchase of stock.
 DEBT FINANCING
- In principle, a company acquiring another pays a specific
amount of money for the merger transaction complete.
PARTIAL OR FULL EQUITY CONVERSION
- This is done by giving the shareholders of the target company
offers that include a debt instrument in a partial or in full payment
of shares.
SHARE SWAP/ALL SHARE DEAL
- In a takeover, sometimes the transaction can entirely be
financed by a share swap or all share deal.
EXTERNAL FORCES
AFFECTING GOVERNANCE
COMPETITORS
It refers to corporations and other business
entities, public or private, offering the same
product or services that a company is offering.
FINANCIERS
It is a term given to a person or entity who
manages routinely huge amount of money.
 REGULATORY AGENCIES
It refers to a public authority or government agency
responsible for exercising autonomous authority over some
area of corporate activity in a regulatory or supervisory
capacity.

WATCHDOGS
It refers to the independent organizations trying to police a
particular industry or corporate conduct to make certain
that the activities of these companies are accordance with
the acceptable standards and existing laws.
PREDATOR COMPANIES
It refer to corporations that are always on the
watch and waiting for a chance to take over a
certain company, be it via friendly or hostile
takeover.
INFORMATION ENHANCERS,
PROVIDERS & GATEKEEPERS
It refers to independent third party persons or entity
whose cooperation is important because they have the
capability to at least deter, if not prevent misconducts of
corporations.
INVESTMENT BANKERS
It is an individual entity which acts as an agent for
corporation issuing security.

ROLE OF INVESTMENT BANKER

Origination (Investigation, Analysis and Research)
Underwriting (Public Cash Offerings)
2 ways of underwriting: Negotiated underwriting & competitive bidding
2 types of underwriting syndicates: Divided and undivided syndicate
Distribution
STOCK EXCHANGES
It refers to an entity which offers trading
services and facilities for stock brokers and
traders, to buy and sell shares of stock and
other securities.
ROLE OF STOCK EXCHANGES

1. RAISE CAPITAL
2. MOBILIZE SAVINGS
3. FACILITIES GROWTH
4. DISTRIBUTES PROFIT
5. IMPROVES CORPORATE GOVERNANCE
6. CREATE OPPORTUNITIES FOR SMALL INVESTORS
7. FACILITIES RAISING CAPITAL FOR THE GOVERNMENT
8. INDICATOR OF ECONOMY
 FINANCIAL PRESS
It refers to newspapers, magazines, TV
channels, broadcasts programs and
other media specializing in financial
news and updates.