Discuss the agency problem relating to multinational companies, and in Essay

Discuss the agency problem relating to multinational companies, and in particular multinational banks, and how, they differ from - Essay Example The situation of agency problem is such in many of the organizations that the agents or the management of the organization makes use of their authority for deriving personal benefits rather than benefits of the principals or the shareholders. In other words, agency problem arises due to the conflicting interests among the management, creditors and shareholders’ regarding the goals of the organization as well as that of the concerned parties (Investopedia, 2011). The agency problem in multinational companies can be appropriately discussed by focusing on the ways as to how the supervision and regulation affects the risk-taking measures of the banks in the host-country (Ongena & Et. Al., 2011). This research paper is aimed to present the discussion on agency problem in multinational companies, particularly banks, through review of various aspects related to the evolution of the problems. The research also aims to present a comparative study of the agency problems faced by the mul tinational organizations and domestic organizations. Two Most Common Agency Problems in Banks In the non-financial corporations, an incentive is provided to the shareholders through limited liability that allows them to seize bondholders’ wealth by increasing the level of risk. The government is indulged in protecting the bond holders from the outcome of risk taking activities of the banks. Thus, the shareholders’ incentive to supervise and restrain risk taking is low. In the banking literature, such situation of absence of discipline is known as the â€Å"moral hazard problem associated with deposit insurance†. A second very common situation of agency problem arises due to the limits on the wealth of managers that forces a separation of control and ownership. This forces the managers to consider their own objectives to be more important than that of the shareholders (Demsetz, 1997). Agency Problems and Risk Taking at Multinational Banks The root cause of agency problems in multinational companies, particularly banks is related to the structuring of regulations for multinational banking units. The host country is more interested in structuring the regulations in such a way that would provide disadvantage to the foreign firms to compete with the domestic firms. But this notion would result in inconsistency with the objective of a single market (Baum, 2002). The consequence of leaving the supervision and regulation in the home country, as evident from the case of the European Union, is that the member countries adopted different structures of regulation and supervision for the financial institutions. Thus, if the multinational banks are faced with similar regulatory issues, they would either split according to functions or would consolidate regulation into one agency. In that case, in certain situations the Central Bank will be involved, whereas in other cases, it would not. Hence, it is evident that considering these regulatory issues, the multinational banks would select policy trade-offs on the basis of their degrees of responsibilities and