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a. Report the percentage of the procurement budget used for significant locations of operation spent on suppliers local to that operation (such as percentage of products and services purchased locally).
b. Report the organization‘s geographical definition of ‗local‘.
c. Report the definition used for ‗significant locations of operation‘.
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Jensen and Meckling (1976) define the agency relationship as ―a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent.‖ Agents correspond to managers, whereas principals correspond to shareholders from a companies‘
perspective. Agency costs stem from the assumption that the two parties, agents and principals, have different interests.
Monitoring costs are paid by the principals, shareholders, to limit the agents‘ aberrant activities. Bonding costs are paid by the agents, managers, to guarantee that no harm of the principal‘s interests will result from their decisions and actions. Residual loss stems when decisions of the agents diverge from decisions that would maximise the principal‘s welfare. Accordingly, the agency cost is the summation of the monitoring cost, bonding cost, and the residual loss (Jensen and Meckling, 1976).
The agency relationship leads to the information asymmetry problem due to the fact that managers can access information more than shareholders. Optimal contracts is one of the means of mitigating the agency problem as it helps in bringing shareholders‘
interests in line with managers‘ interests. In addition, voluntary disclosure is another means of mitigating the agency problem, where managers disclose more voluntary information reducing the agency costs (Barako et al., 2006) and also to convince the external users that managers are acting in an optimal way (Watson et al., 2002).
The agency problem was first highlighted by Adam Smith in the eighteenth century The agency theory was initiated from the work of Adolf Augustus Berle and Gardiner Coit Means with main emphasis on agent and principal relationship in early 1932 (Berle & Means,1932). The agency theory was explored by Ross (1973), with the first detailed description of the theory presented by Jensen and Meckling in 1976. Both streams concern the contracting problem of self-interest as a motivator of both the
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principal and the agent, and they share common assumptions regarding people, organisations and information disclosure. Berle and Means (1932) argument was that separation of ownership and control is one of the key features of modern corporations, and corporate governance has become necessary to mitigate the principal–agent problem. The agency relationship is described by Jensen and Meckling (1976) as a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf, which involves delegating some decision-making authority to the agent.
The theory further explains that management acts as the agent of the corporation while the shareholders are the owner (principal) of the corporation. Shareholders are always expecting the agents to act in the best interest of the principal. Unfortunately, in many circumstances, the agents may act in their self-interest. Agency theory views the firm as a nexus of contracts between various economic agents who act opportunistically within efficient markets (Reverte, 2008). According to this theory, shareholders who are the owners of the corporation appoint managers or directors and delegate to them the authority to run the business for the corporation‘s shareholders (Clarke, 2004). The agency relationship between two parties is defined as the contract between the owners (principals) and the managers or directors (agents) (Jensen & Meckling, 1976). On the basis of the agency theory, shareholders expect the managers or directors to act by way of qualitative information disclosure and make decisions in the owners‘ interests. However, managers or directors may not necessarily always make decisions in the best interests of the shareholders (Padilla, 2002). The separation of ownership and control produces an innate conflict between the shareholders (principals) and the management (agents) (Aguilera et al., 2008). This conflict of interest can also be exacerbated by ineffective
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management monitoring on the part of shareholders as a result of shareholders being dispersed and therefore unable, or lacking the incentive, to carry out necessary monitoring functions. Consequently, the managers of a company might be able to pursue their own objectives at the cost of shareholders (Hart, 1995).
Shareholder efforts to monitor the agent, for instance, shareholder engagement and incentive schemes or contracts lead to additional costs for the company. Grant (2003) argues that the main purpose of shareholders (principals) is to maximise their value (interest), whereas the main purpose of agents is to expand and grow the corporation because success will reflect favourably on management. According to Hart (1995), a corporate governance issue occurs in an organisation in the presence of two conditions. First, there is a conflict of interest or agency problem between members of the company. Second, the conflict of interest or agency problem cannot be dealt with through a contract.
Effective information disclosure and corporate governance can reduce agency costs and tackle problems related to the separation of ownership and control. The objective of corporate qualitative information disclosure and corporate governance then, is to encourage management and owners to make decisions or management to make the same decision that owners would have made themselves, such as investment in positive net present value (Shleifer & Vishny, 1997). Gursoy and Aydogan (2002) argue that the problems of the separation of ownership and control on the one hand, and cost agency on the other, could be reduced by the qualitative information disclosure or corporate governance because they promote goal congruence (Conyon & Schwalbach, 2000). However, Jensen (2001) highlights that these issues will increase if the corporate governance structure is weaken and no
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adequate qualitative information disclosure. Therefore, the aim of the agency theory is to determine the most cost-effective governance method for tackling any possible agency issues (Dey, 2008).
According to the agency theory, corporate qualitative information disclosure are needed to mitigate the problems associated with the theory, which is designed to provide the basis of corporate governance through the use of internal and external mechanisms (Weir, Laing & McKnight, 2002; Roberts, McNulity & Stiles, 2005). Thus, the aim of the agency theory is to concentrate on shareholders‘ rights and the separation of ownership from control so that a company can maximise the wealth of its shareholders and as well information are disclosed. The classical article of Jensen and Meckling (1976) build on this theory and try to define agency relationship. According to Jensen and Meckling (1976, p.308),―an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. If both parties to the relationship are utility maximizers there is good reason to believe that the agent will not always act in the best interests of the principal‖.
The shareholders can control the agent by methods like auditing, formal control systems, budget restrictions and the establishment of incentive compensation system (Jensen & Meckling 1976).
Corporate reporting researchers and investors have also affirmed that firms can increase the monitoring of managers by ensuring that qualitative information are disclosed in the corporate report for the interest of shareholders. Therefore, non-financial
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information disclosures in corporate annual reports are therefore considered part of the monitoring package to reduce the information asymmetry and agency problems with their resulting costs (Cormier, Ledoux & Magnan, 2011). Empirical results for the above reasoning are limited, although agency theory predicts a positive relation between ownership, profitability and qualitative information disclosure (Adrem, 1999). According to Vu (2012), using agency theory, it is argued that companies with higher management of ownership structure may disclose less information to shareholders through voluntary disclosure. The demand for more information from the agents by the principals arises as a result of separation of ownership of companies‘
resources from those who control it (Hassan et al, 2009). However, this demand may not be met as agency problems remains on the increase. This has spurred many studies to investigate what spurs the agency problems in a company and hence, affect corporate disclosures. It is believed that non-financial information can go a long way in solving agency problems.
Agents correspond to managers, whereas principals correspond to shareholders from a companies‘ perspective. Agency costs stem from the assumption that the two parties, agents and principals, have different interests. Monitoring costs are paid by the principals, shareholders, to limit the agents‘ aberrant activities. Bonding costs are paid by the agents, managers, to guarantee that no harm of the principal‘s interests will result from their decisions and actions. Residual loss stems when decisions of the agents diverge from decisions that would maximise the principal‘s welfare. Accordingly, the agency cost is the summation of the monitoring cost, bonding cost, and the residual loss (Jensen and Meckling, 1976).