(Chapter 12) Implementing Corporate Diversification

Agency Problem

A conflict of interest arising between creditors, shareholders and management because of differing goals.
For example, an agency problem exists when management and stockholders have conflicting ideas on how the company should be run.


Agency Costs

A type of 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.


Organization Structure - M Form / Multidivisional Structure

Division = Strategic Business Unit (SBU) = Profit-and-loss centers

Shared Activity Managers: Support the operation of multiple divisions (bounding)

Board of Directors: Monitoring – Evaluating firm’s decision making, consistent with the interests of Equity holders.

Division General Managers: One unit is like a company but have to decide how division will corporate strategies assure strategy implementation (bounding)