ENTR314
COURSEWORK ASSIGNMENT
S.DAS

KARAN ASTHANA BBA GENRAL 3rd YEAR 130134

***Illustrate the main sources of agency costs in family firms and their possible remedies.

“Family involvement in a business has the potential to both increase and decrease financial performance due to agency costs”
“An agency cost is a type of an internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders.”

“Some common examples of the principal-agent relationship include: management (agent) and shareholders (principal), or politicians (agent) and voters (principal).
Agency costs are inevitable within an organization whenever the principals are not completely in charge; the costs can usually be best spent on providing proper material incentives (such as performance bonuses and stock options) and moral incentives for agents to properly execute their duties, thereby aligning the interests of principals (owners) and agents.”

Family firms lose its focus and initially its strategies during the transition period. These firms would be performing perfectly in sync with utmost respect for each other but when the time comes for choosing the next successor the whole family goes off equilibrium and takes their eyes off the big picture and the vision dies for the time. The agents role in this kind of a situation is to approach that person with good relationships with key individual and make them understand that how important it is for the family to decide together and act as a team during this transition, the family members must understand their individual objectives and goals and should be given the certainty that everything would be coordinated in the best interest of the firm and not according to their demand. Business advisory board even though they don’t take decisions in the firms activities play an important role in effective succession management and agents make sure that a well deserved candidate is chosen.
Private companies have a separate department for data maintenance and handle these activities in a very professional manner as it is very necessary to have a good professional data system during the decision making period but in a family firm it is not an important priority to maintain data in an effective manner and this is where they lack professionalism, so the agents job in this situation would not be to maintain the irresponsibility of the firm the part they play is that they promote and boost professionalism in the firm by discovering the effective talent and using its capabilities. The agents would also want and implement proper documentation of the data that is carried out during the transactions of the business. If the agents feel that none of the members are capable enough to carry out the duties and continue to make mistakes they would help the firm in planning its operations and also carry out and help the members of the family in implementing those operations for the firm. The agents are aware how important it is for the principal to have success in the business as the agents profit and income depends on the family firm’s success.
The non family firms choose their employees from the vast pool of talent as there are so many candidates with lots of potential and they can climb up the corporate ladder by acquiring more skills and polishing their craft but in the family firms different family members have different level of knowledge and the future of the firm depends on how much do they know as a family, differences can arise in this situation among different family members having different though pattern some might want to continue their old traditional methods while the other member of the family might want to explore new technologies and the latest inventions in their field of work. The agent in this kind of situation need to balance out the demands of the disputed family members they have to make them aware that in today’s time the business environment is dynamic and continuous upgrade of strategies is required to beat this competitive market but it is not important to invest the resources only in the new technologies there are situation where traditional model is still better than the new inventions although the renewal of strategies is a never ending activity the agents job is to skillfully utilize the firms resources and avoid the conflicts among the family members on this topic.
If the non family firms see that two super powers of the firm are having a rivalry they can be replaced and it would not affect the firm deeply by the loss of those members because they are replaceable and the talent pool is vast in today’s dynamic environment and in no time the firms would have trained its new member all the skills they would require to carry out the duties but if siblings or any other family member indulge into rivalry and head to the separation of the family firm it would destroy the family firm and it is impossible to replace the members however if the principal hires an agent to solve the conflict the most important job of the agent would be too adopt the negotiation terms of the two parties. The conflict can only be resolved if the two disputed family members come to on common terms and agree to the negotiated deal and adopt the approach for the betterment of both the parties and for the family firm. The agent needs to individually listen to the demands of the two members and decide and come upon a common treaty which could save the firm and satisfy the two members.
In a company with non family members it is unacceptable for employees to be rude to their subordinates and the law protects the employees and subordinates from the harsh behavior of the employer. The employer doesn’t treat all their employees equally the employee has to earn the respect of the employer by his performance and stand apart from the rest to gain the trust and respect of his employer the same cannot be said for the family firms the employee could be any family member and maybe the employer would be partial to the employee this results in different attitudes towards different family members and they are not judged on their performance sometimes. This partiality can incur a huge loss for the growth of the firm and the employee who is being treated without integrity. The agents role in this situation is to promote communication amongst the family members and not let any favoring relationship hidden, if the employer wants to mentor the employee than it is not an issue but if the resources of the business are not being utilized effectively like in this case the manpower then the agent would make sure that the scalar chain that he makes boosts full potential of each and every member of the firm and he would not allow a free pass to anyone.
In every firm not everyone is interested in the interest of the shareholders many times managers take decision which are not in sync with the interest of what the shareholders demand but the laws protect the shareholders and after a little ups and downs all the actions are taken in the interest of the shareholders and anyone that is against the decision is removed from its position. Seldom is it true for the family firms the interest of the family members are slightly in themselves and their position that they are holding in the firm, they are not concerned with the vision of the family firm as a single unit instead they all try to beat the business by profiting themselves and this approach can only last for a short period of time. When there is a conflict of interest amongst the family members the agents do not stop this as they cant deviate the interest of those family members who want to do something apart from the business instead the agents promote the ideas of these family members and supports them to expand their ideas and information into something productive which could in the near future turn into another profitable business which would just mean expansion of the current family business.

Big firms in today’s dynamic environment cares a lot about their employees the biggest resource of any organization is the human resource capital, without giving time and energy in motivating and knowing your workforce you cannot move them. Employers are trained to relate to their employees emotionally so that they know what moves and motivates a particular employee as needs are diverse among so many employees. The development of the firm and the product being produced solely depends on the employees working in the firm and this area is not neglected. The family firms have their family members along with non family members as their employees but their approach towards them is not very strong so the job of the agent is to provide the knowledge to a few family members that how important it is to invest in their employees as it is them who run the organization and the all the profits that they hope on making would only come from their performance. The family members expect to reap profits of the business in a short period of time avoiding them to build relationships with their assets which is the human resource so the agent bridges the gap between the business owners and the people working for them.
The sole reason of the business is to satisfy the customers and fulfill their needs. The firms compete harshly with each other to earn a bigger slice of the market. The only way to earn bigger market is to continuously improve the firms operation and work together towards a better service or product. The firms work really hard to achieve it but in family firms there are times when this doesn’t happen and due to lack of market skills these firms with little knowledge drive away the only customers they have. The marketing part of the firm is weak resulting in this so the agent would approach the elder member of the family or maybe the principal and work together as a team in educating the members of the firms because these habits would only show how insensitive the members are towards the customers.

“Agency costs are investigated by comparing family and non-family firms. The nature of different agency costs is discussed and agency cost control mechanisms are suggested. A study of 1,141 small, privately-held U.S. family and non-family firms yielded results that showed that an overall agency problem in family firms could actually be less serious than in non-family firms. The study explores family involvement effects that are independent of agency costs, the effectiveness and use of agency control mechanisms, interactions of family involvement and agency cost control mechanisms, agency cost drivers that are unrelated to family involvement, and performance drivers that are unrelated to agency costs and family involvement. Conclusions indicate that, when removing the effects of agency cost control mechanisms, family and non-family firms had similar economic growth based on short-term sales growth. Also, strategic planning was found to have a direct, positive impact on performance. Non-family firms gain more from having at least one agency cost control mechanism, such as strategic planning”

BIBLOGRAPHY

Google Books, (2015). Family Business Studies. [online] Available at: https://books.google.co.in/books?id=rH7AlYcWXOoC&pg=PA242&lpg=PA242&dq=agency+cost+in+family+business+groups&source=bl&ots=y5dBJprhPp&sig=ozMsaDCmCfXWDw9TcCXa7VUZoPU&hl=en&sa=X&ved=0CDIQ6AEwA2oVChMIt5OnkZ3wyAIVJFumCh11yg5d#v=onepage&q&f=false [Accessed 1 Nov. 2015].

Investopedia, (2003). Agency Costs Definition | Investopedia. [online] Available at: http://www.investopedia.com/terms/a/agencycosts.asp [Accessed 1 Nov. 2015].

Chrisman, J., Chua, J. and Litz, R. (2004). Comparing the Agency Costs of Family and Non-Family Firms: Conceptual Issues and Exploratory Evidence. [online] Papers.ssrn.com. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1509217 [Accessed 1 Nov. 2015].

Chrisman, J., Chua, J. and Litz, R. (2004). Comparing the Agency Costs of Family and Non-Family Firms: Conceptual Issues and Exploratory Evidence. Entrepreneurship Theory and Practice, 28(4), pp.335-354.