Discuss the four types of agency relationships.

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1. SHAREHOLDERS VERSUS MANAGEMENT RELATIONSHIP
In large corporations, ownership is often spread over a wide range of shareholders. By comparison, the management may compromise of only a small number of people, with a relatively small ownership in the business. In effect managers may not represent the shareholders as a whole. Therefore they may be enticed to pursue their own goals rather then that of the shareholders. In doing this a number agency costs or conflict can arise.

2. STOCKHOLDERS VERSUS CREDITORS RELATIONSHIP
Creditors have the primary claim on part of the firm's earnings in the form of interest and principal payments on the debt as well as a claim on the firm's assets in the event of bankruptcy. The stockholders, however, maintain control of the operating decisions (through the firm's managers) that affect the firm's cash flows and their corresponding risks. Creditors lend capital to the firm at rates that are based on the riskiness of the firm's existing assets and on the firm's existing capital structure of debt and equity financing, as well as on expectations concerning changes in the riskiness of these two variables.
Agency problems or conflict will arise when shareholders take actions which reduce the market value of creditors’ debts such as bonds and debentures.

3. STOCKHOLDERS VERSUS AUDITORS RELATIONSHIP
If as simple agency theory implies, principals do not trust agents to provide them with reliable and relevant information, then they will hire in external experts, who are independent of these agents. This, however, introduces the concept of auditors as agents of principals, which leads to new concerns about trust, threats to objectivity and independence.
Auditors act as agents to principals when performing an audit and this relationship therefore brings with it similar concerns with regard to trust and confidence as the director-shareholder relationship, prompting questions about who is auditing the auditor. Like directors, auditors will have their own interests and motives to consider. For example, auditors may be risk averse and being conscious of their potential liability, introduce risk management processes that result in limitations in the scope of their work and caveats in their reports which principals may find frustrating. Agency problems or conflict will arise when shareholders take actions which are not in the best interests of the shareholders.

4. STOCKHOLDERS VERSUS GOVERNMENT RELATIONSHIP
Shareholders and by extension the company they own operate within the rules and guidelines set by the government. The government in this relationship is the principal while the shareholders are the agents. The company and its shareholders as agents may take some actins that might prejudice the position or the interests of the government as the principal.

Lellah answered the question on November 8, 2021 at 06:21

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Discuss the four types of agency relationships.

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