The agency problem in corporate governance

The agency problem in corporate governance

In a company, the decision-making mechanism can be complicated. Since there are more players involved, the existence of a regulation is necessary. Corporate governance is a set of rules of decision-making processes whereby companies are internally managed and supervised by the Board of Directors to protect the interests of all external and internal users (stakeholders). By issuing and implementing decision-making rules and procedures, corporate governance also distributes the rights and responsibilities of each of those involved.

If we accept that corporate governance in fact means managing the company with all its internal components integrated with risk management, financial management, and internal control, then the implications for financial audit and accounting are obvious. We could say, summarizing the role of corporate governance and auditing, that corporate governance means the transparency of the way in which the company's business activity is achieved and the attainment of the objectives set, while the financial audit ensures that they are achieved / achieved in accordance with the legal framework.

An effective corporate governance process leads to increased financial transparency and financial accountability, reducing the risk of fraud. On the other hand, financial reporting will become more complex with the implementation of effective copying governance.

One of the main challenges of companies in Romania, and I am referring especially to companies with Romanian capital, is to understand and accept the transition to another stage of development that requires the implementation of corporate governance.

Another challenge is given by agency problems where one (the principal) calls another party (the agent) to perform a service. Because both sides want to maximize their benefits, they can get to situations where the agent no longer acts in the principal's interest.

Under these circumstances, for example, it may happen that managers are more interested in maximizing their personal benefits and not increasing the value of the company. The solution often consists in setting a suitable remuneration package for managers, correlated with setting a set of indicators that will make them act only to increase the value of the company.
Unfortunately, because in most cases wages account for the highest share in the benefits package, managers are flattening, becoming "sufficient," and no longer interested in making efforts to increase the company's financial performance. At the same time, the correlation between managers' pay and performance achieved by the company, or other indicators, urges them to use accounting manipulations to "make up" their economic and financial results by giving them a beautifully colorful photo of the company's performance to maximize of their own remuneration.

According to studies relevant to Romania, possible solutions that reduce agency problems are: adequate preparation of management in conjunction with effective control policies, external audit, performance monitoring, and diversification of managers' bonuses.

Corporate governance provides more assurance that an effective control system is implemented at the entity level, ensuring that all users are properly and legally run for the benefit of all stakeholders and shareholders.

In most cases, the diversification of the remuneration method bears a large weight in solving the problems of the agency, the most important of which are the non-monetary shares and benefits. That is why the training of managers in training, training and professional consolidation activities is a welcome approach for both the company (principal) and the employee (agent).