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Agency Theory and Business Management


In the concept of managerial accountability, what legal compliance issues could come up? 

The concept of managerial accountability covers the ability of the business houses of managing their financial aspects and controlling the operations. The concept also includes the environmental and societal aspects of the business with the financial aspects of the business and rights of personnel. Managerial accountability is responsible for the success or failure of business with the improvement in the performance for getting effective results. The legal compliance issues that can arise due to the improper practices of business are related to financial practices, human rights, trade unions, environmental organizations, etc.   

What is agency theory? 

Agency theory is based on the relationship of shareholders and the managers of the company. Its main emphisis is on the differences in the objectives of the managers and the shareholders. The managers have to take strategic decisions for providing effective incentives to the shareholders because shareholders expect to earn benefits from their investment in the company. The theory has the direct relationship with the decisions based on portfolio investment. 

What ethical issues can arise with Agency Theory?

The ethical issues that can arise due to the agency theory are of two types. Firstly, the ethical issues arise due to the differences in the objectives of the principal and agent conflict. Secondly, the ethical issues arise due to the plans of the agent, which are not known to the principal. It arises due to the differences of the principal and agent's perception towards the assessment of risk. We can consider the example as follows: If the strategy of the manager proves to be effective, then the shareholders will enjoy higher returns on their investment. If the risk evaluation of the manager goes wrong, then the shareholders will not face more loss due to the limited liability, but the manager will have to face losses. Such a situation can be avoided by utilizing hedging process for the activities of the shareholders. 


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