The main goal of financial management is to maximize intrinsic stock value for the benefit of society. In this sphere, special companies, minimize costs through innovation in the production process, create value for the customer by providing quality services and products, and creating value for employees through training and development and foster an environment that allows employees to utilize their skills and talents.
Suppose you decide to start a company. Your product is a software platform that integrates a wide range of 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 to go nationwide. At some point, hopefully sooner rather than later, you plan to go public with an IPO, then to buy a yacht and take off for the South Pacific to indulge in your passion for underwater photography. With these issues in mind, you need to answer for yourself, and potential investors, the following questions.
Assignment: Write a short answer to these questions using the above case.
- 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?
- Explain why “maximation of shareholders’ wealth” is the appropriate goal of the firm.
- What items of good corporate governance serve to mitigate the tension between owners and managers?