Basic Terminology - The managerial agency problem

Table: Basic Terminology - The managerial agency problem

Go back to figure explaining the main issues of the managerial agency problem.

Main economic concep ts

Financial performance

Financial performance is limited to measures of how well a firm is using its financial resources, such as shareholder equity and debt. A few examples are return on assets, return on equity, Tobin's q, and risk adjusted market returns. As these examples show performance is often measured from the owners' point of view. This is not a coincidence. The reason is that these principals normally are the residual claimants of the firm's profits and therefore stand to loose (or gain) the most from the firm's activities. The owners therefore normally have the strongest needs and incentives to be informed about financial performance. More information.

Corporate returns

The money paid for use of corporate resources. Can either be a return from a flow of services/goods or a return for having access to a stock of capital. Examples of the former include wages paid to employees and payment made to corporate suppliers. Examples of the latter include interest paid to creditors and dividends paid to equity investors. More information.

Corporate resources

For example, the work of employees, the products from suppliers, the capital from creditors, and the capital from investors. More information.

Production costs

The costs of transforming inputs into outputs or direct production expenses, Wallis and North [1986, page 97]. More information.

Transaction costs

The costs of making exchange or indirect production expenses, Wallis and North [1986, page 97]. More information.

Basic economic players

Agents

People who get paid to execute a job for other people (the principals). In corporate governance the relevant agents are the managers and the directors.

Principals:

People who pay other people (the agents) to do a job for them. In corporate governance the principals usually are the owners of the firm. However, if for example the creditors are very powerful compared to the owners it may be more relevant to treat them as the managers' principals rather than the owners.

Transacted items

Management services

All the things that a manager need to do in order to fulfill his job on behalf of the people who hired him.

Management remuneration

The money that managers are paid for doing their job.