3101AFE Accounting Theory - Application Of Agency Theory To Tesla Inc. - Article Analysis

Article 4: Tesla Shares Plunge after Elon Musk Smokes Marijuana during Interview

Word Count: 103

This article by Bowden (2018) discusses the shareholders’ concern about the management capability of the CEO of Tesla, Elon Musk. The concerns could be attributed to several factors- Elon Musk tweeting about taking the company private, the accounting chief resigning within one month of joining, head of the human resource deciding not to re-join the organisation, several other top executives leaving the organisation, and Elon Musk smoking marijuana in an interview on YouTube. The company is facing manufacturing delays, is subject to a federal investigation regarding the earlier-mentioned tweet. These issues have resulted in a sharp decline in the share price of Tesla. 

Article 4: Agency Theory

Word Count: 230

The theoretical framework applied is the agency theory which concerns both the agency problem and solution (Jensen & Meckling, 1976, p. 307). Wasserman (2006, p. 963) argued that owners are different from the managers in many firms, with each having their own interests. In a firm, the relationship between owners and agents is based on a contract (Alchian & Demsetz, 1972, p. 782) and this contract governs how the agents manage the business on behalf of the owners. Whilst the agents are appointed to maximise shareholder value, there may be potential conflicts, which can be termed as an agency problem.

Panda and Leepsa (2017, p. 78) argued that the agency problem is not confined to owners and managers (principal-agent problem) as in an organisation there can be different sets of owners- majority shareholders and minority shareholders. The agents are appointed by the majority shareholders and these agents tend to give priority to the interest of majority shareholders at the expense of minority shareholders. In many cases, the majority shareholders themselves act as the managers and since they have high voting power, they can take decisions which benefit themselves, even if adversely impacts the interest of the minor shareholders. The above is particularly true in case of listed firms where a significant power resides with the majority shareholders (mostly the promotor) and minority shareholders have limited saying in matters of management.