"My management staff are always stealing"
"It's difficult to find competent management in Nigeria"
What you are really describing is the principle-agent problem.
"It's difficult to find competent management in Nigeria"
What you are really describing is the principle-agent problem.
The principal-agent problem in behavioural finance/economics describes how there is often a conflict of interests between owners & management
The principle is the owner of an asset and the agent is the person to whom control of the asset has been delegated.
Image source: CFA
Image source: CFA
When people say "Nigerian owners want to control everything, they don't delegate to competent managers".
It's often because those owners don't want to pay agency costs.
It's often because those owners don't want to pay agency costs.
The risk that the agent will act in a way that is contrary to the principal’s best interest can be defined as agency costs.
The principal-agent problem has become a standard factor in economics.
The theory was developed in the 1970s by Michael Jensen of Harvard Business School and William Meckling of the University of Rochester.
The theory was developed in the 1970s by Michael Jensen of Harvard Business School and William Meckling of the University of Rochester.
The principal-agent problem can also lead to an individual taking an excessive risk because the ultimate cost is borne by someone else. This is an example of moral hazard.
Given agents are human, managers may succumb to self-interest, short-termism, or opportunistic behavior that violates the interests of principals.
The agent usually has more information than the principal because she/he is in charge of day to day operations.
This difference in knowledge is known as asymmetric information.
This difference in knowledge is known as asymmetric information.
In many real-world examples, the agent will not prioritize the best interest of the principal, but will instead pursue his own goals.
Because of poor rule of law, education, early capitalism, shallow financial markets, culture and the fact that in certain circles fraud is acceptable, principle agent problems maybe more common in Nigeria
However, the principal-agent problem can lead to market failure because the agent pursues his own self-interest rather than that of the principal and the business may be run in an inefficient way.
Solutions to the principal-agent problem include performance based pay, a board of directors, systems & processes, forensic audits etc.
Many of these increases agency costs.
Many of these increases agency costs.
• • •
Missing some Tweet in this thread? You can try to
force a refresh
