Reference no: EM132125552

Question: Early in our study of principal-agent relationships we used the example of shareholders as principals and management as their agent. Is it possible that Tyson's corporate management only engages in extensive risk management to make itself look good to shareholders by generating steadier income for them in the short term? In other words, if it did not have to bear the costs of risk management Tyson's long-term profits would be greater but shareholders would have difficulty discerning this fact. (Remember that risk management is not a profit center but an activity that is expected to do no more than break even.)41 As a shareholder in some other company you probably have no objection to management insuring its buildings against fire, itself a basic form of risk management. Why is that practice unlikely to generate principal-agent problems?