EECS 1019 Lecture 11: EECS 1019 Lecture 11 Notes
15 Jun 2018
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EECS 1019 Lecture 11 Notes
Introduction
Corporate Control of Agency Problems
• A oo ietie is to proide aagers ith the MNC’s stok (or optios to u
that stock at a fixed price) as part of their compensation
• Thus the subsidiary managers benefit directly from a higher stock price when they make
deisios that ehae the MNC’s alue.
• EXAMPLE
• When Seattle Co. (from the previous example) recognized the agency problems with its
Singapore subsidiary
• It created incentives for the manager of the subsidiary that was aligned with the
paret’s goal of aiizig shareholder ealth.
• Speifiall, it set up a opesatio sste here the aager’s aual ous is
ased o the susidiar’s earigs.
• In the example of Seattle Co., the age proles ourred eause the susidiar’s
management goals were not focused on maximizing shareholder wealth.
• In some cases, agency problems can occur because the goals of the entire management
of the MNC are not focused on maximizing shareholder wealth.
• Various forms of corporate control can help prevent these agency problems and thus
idue aagers to ake deisios that satisf the MNC’s shareholders.
• If these aagers ake poor deisios that redue the MNC’s alue, the aother firm
might acquire it at the lower price and hence would probably remove the weak
managers.
• Moreover, institutional investors (e.g., mutual and pension funds) with large holdings of
a MNC’s stok hae soe ifluee oer aageet eause the ill complain to
the board of directors if managers are making poor decisions.
• Institutional investors may seek to enact changes, including removal of high-level
managers or even board members, in a poorly performing MNC.
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