Business Ethics Structure and Principal Agent Relationship

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Business Ethics, Structure and Principal-Agent Relationship
Q1. Lack of complexity filing requirements is one of the reasons that instill business people to organize small business units before switching to corporate structures. A small firm has no much paperwork or procedural functions which incorporate teams, and thus every activity depends on a one-person decision. Unlike the corporation structure, individuals operating sole proprietorship are not obliged to file annual reports and legal documents. The decision on what structure is simple to manage rise from the advantages evidenced by small organizations.
Operating small business is advantageous and flexible, as the activity exposes a businessperson to more market ideas where he or she may wish to expand in future. However, small structures experience difficulties in raising capital since there are limited sources. Also, there is no continuity of small firms in case the owner becomes deceased or incapacitated. Probably the struggle for capital generation and business progress becomes a motivating factor for business people to decide switching to large structures (Robb, Alicia & Robinson 2). Corporate structure has many sources of financial inflow, for example, from members, loans or investors and also the business continues running even in the absence of one person. However, large business structures are complicated due to many functions and thus require solid management.
Q3. There are hidden difficulties experienced from a principal-agent relationship, and they arise when one group, the agents, decides to function in favor of another party, the principle.

Some agreements may result in more cost for the agent thereby producing a conflict of interest and moral hazards. When business ownership and control become divided between agents and principals, the agents acquire an opportunity to pursue goals which may not agree with the principals’ desire. Asymmetric of information is a pitfall where shareholders and manager may have different attitudes towards a given task because one party is more informed than the other. For instance, when managers have more ideas than the owners, they would tend to decide on their interest than those of the principle. Again, it might get hard for the managers to monitor an agent with excellent information which is hidden. Therefore, this could create a moral hazard problem.
Q5. To enhance the alignment between interests of management and those of stakeholders, the board of directors may conduct a profit related payment. When shareholder invests in an organization, they are interested in the generated profit from their investments. At some point, investors may feel like they have not made the right investment by looking at the earnings per shares. For instance, if a company generates a profit of 20% while the shareholders’ profitability is 10%, this lowers the interest of investors. Therefore, to align this, directors ensure that investors get paid in accordant to the profit raised. Stakeholder has actions towards interest alignment too, and this includes making direct interventions such as firing managers who do not perform well. Also, a stakeholder may strike campaigns against the board demanding reasonable compensation package, where employees are fairly and consistently paid for the duties entailed or work performed.
Q10. Yes, business ethics training is likely to be effective in attracting ethical behaviors in an organization. Usually, moral people can discern the right or wrong, and by so doing, they strive to set examples of proper conduct. However, not all individuals will portray principle of honesty and fairness when relating with other people. Hence, in a business setting, training ethics will help people adopt a culture governed by the right principles. In that way, employees will treat customers or co-workers in the manner which themselves would want to be treated. Business owners would want to retain good employees to help build customer loyalty, as they understand that customers relation has a significant influence on the organization. Training ethics is an approach to maintain talented and principled workers.
Works Cited
Robb, Alicia M. & David T. Robinson. “The Capital Structure Decisions of New Firms.” Review of Financial Studies, vol. 27, no. 1, Jan. 2014, pp. 153-179.