An agency problem involves the conflict between the principals (the shareholders), and the agents (the managers) of a company. One of the reasons agency problems can present serious obstacle to achieving the goal of shareholder value maximization is that even though the shareholders legally own the firm, they do not necessarily have effective control over the day-to-day activities and decisions of the company. The managers of the company have considerable liberty to act. It is not to say that all or even most managers act to harm shareholder interest. However, manifestations of the agency problem are not rare – some are unethical and could even be illegal. For example, the illegal self-dealing of Enron executives, who set up complicated financial structures to hide the company’s debt that eventually led to its collapse in 2001 is a clear example of an agency problem.
However, consider the case of Google’s self-driving car project. The company spent billions of dollars developing prototypes of driverless cars. However, in 2016, it abandoned the effort, shut down the self-driving car project, and decided to limit itself to developing just the technology under the brand Waymo. Some argue that the CEO of Google has extraordinary control over the company and hence may not always look out for small shareholders.
Post: In your initial post, explore whether Google’s self-driving car project is a manifestation of an agency problem. Do a search on Google’s self-driving car project and explore whether this project harmed shareholder interest. Should a company take on projects that might result in a significant monetary loss to the shareholders? Or is it just part of doing business? Explain your answers and the arguments in detail.
