Murugappa Group, Essay Example

The professionalization initiative of the Murugappa Group entailed the Family-member-CEOs of the seven companies, associated with the Murugappa Group, stepping down to join a board in 1999. These family members were in turn replaced by non-family members, which exposed the family to the possibility of incurring agency costs.

Agency costs are those most commonly affiliated with utilizing the services or assistance of an agent. These costs can stem from a range of sources, one major cost being that the agent could use company sources to benefit their own agenda or that is just counterproductive.  Some other types of agency costs that can occur involve taking necessary precautions to ensure the agent’s motives are aligned with that of the company in the form of bonuses, additional benefits, or equity payments. These costs are almost required to ensure the agent is fairly compensated in relation to the responsibility with which he is being entrusted. It is believed that that high compensation can mitigate the risk of the agent causing greater cost down the road due to neglect, mismanagement or lack of focus and alignment with the corporate culture of the organization.

In the Murugappa Group case, the family could face agency costs, but it could also be argued the family could avoid them based on the history of the family’s close relationship with the agents. The primary reason why agency costs occur is due to factors like divergence of control, contracting costs and separation of ownership. Since the main focus of the Murugappa Group case is separation of ownership, and this is one of the main triggers of agency costs, it’s standard that the family face agency costs. The reason why one might think they won’t be exposed to agency costs, in the same manner as a Western family owned organization making a similar professionalization transition, is due to the long honored traditions of the family by their staff and the fact that they hired the agents from within. The problem is that despite hiring from within, the family still has to account for fairly compensating all of their executives across all companies as incentive for safeguarding the best interests of the Murugappa Group as a whole, and this is major agency cost in of itself.