Agency Relationship
An agency relationship occurs when an individual or organization, the principal, hires an agent to carry out responsibilities of importance to the principal. The principal delegates power to the agent, a typical agency relationship between stockholders and managers (Dong et al., 2021). For the subject case, no agency conflicts will occur when I am my only business employee because no duties are delegated to anyone. Agency problems will arise when the company expands and more people are hired. This is so because some responsibilities will be charged to the hired employees. Agency problems will occur due to the employed people serving their interests instead of the interests of their employers.
Agency conflict occurs at any given time when shares are sold to external investors. Investors who purchase the shares will wish to be involved in the company’s decision-making process. However, minimal agency conflicts will likely occur because I will still control most of the stock and thus decision-making. The nature of agency problems that are likely to occur between the major and minor shareholders
When the company acquires funds from external lenders, agency conflicts will likely occur between the firm’s management and the lenders or creditors. The lenders will be concerned about how their money is used to ensure they will be repaid as agreed. Further, they charge interest on the borrowed money irrespective of whether profits are made. Notably, this is an example of agency costs that are likely to occur. Further, risk analysis is conducted by managers and lenders, and the findings can influence other people who may invest in the firm. If the risk is low, more investment will be attracted, and if it’s high, investors will turn away, and the firm will pay this indirect agency cost.
References
Dong, J. Q., Karhade, P. P., Rai, A., & Xu, S. X. (2021). How firms make information technology investment decisions: Toward a behavioural agency theory. Journal of Management Information Systems, 38(1), 29-58.
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Question 
This assignment aims to explain core corporate valuation and governance concepts and identify strategies for conducting business with personal and professional integrity.
Agency Relationship
Read Chapter 13, Mini Case in Financial Management: Theory and Practice. Using complete sentences and academic vocabulary, please answer questions A through d.
Using the mini case information, write a 250-500 word letter of intent discussing specific strategies for how you will conduct your start-up business with personal and professional integrity.
Suppose you decide (as did Steve Jobs and Mark Zuckerberg) to start a company. Your product is a software platform that integrates various media devices, including laptop computers, desktop computers, digital video recorders, and cell phones. Your initial market is the student body at your university. Once you have established your company and set up procedures for operating it, you plan to expand to other colleges in the area and eventually go nationwide. Hopefully, sooner rather than later, you plan to go public with an IPO, buy a yacht, and take off for the South Pacific to indulge in your passion for underwater photography. With these issues in mind, you must answer the following questions for yourself and potential investors.
- What is an agency relationship? When you first begin operations, assuming you are the only employee and only your money is invested in the business, would any agency conflicts exist? Explain your answer.
- If you expanded and hired additional people to help you, might that give rise to agency problems?
- Suppose you need additional capital to expand and sell some stock to outside investors. What agency conflict might occur if you maintain enough stock to control the company?
- Suppose your company raises funds from outside lenders. What type of agency costs might occur? How might lenders mitigate the agency costs?