Business goverance Essay Example | Topics and Well Written Essays - 1250 words - 1

Business goverance - Essay Example The BLM wants to charge the DBD $3 million in case the DBD does not reclaim the land when it has done drilling. In this case, a problem between the two arises. In understanding the situation at hand, we must look carefully at what a principal – agent problem is. The principal – agent problem occurs when a situation arises that motivates an agent to represent the principal in dealing with a particular situation. The BLM may be unable to meet the cost of drilling or may be too involve to drill the oil (Winch 2010, 28). This makes them delegate the whole drilling to another company. DBD, on the other hand, may be specialized in the drilling of oil and they may be the best person who can drill this. In leasing the land by BLM to DBD the company stands to gain more than it can lose as the cost of drilling and maintenance will be passed on to DBD. Nevertheless, a problem arises where they are not sure whether DBD will reclaim the land after it is done with drilling or not. It, therefore, wants to charge DBD $3 million as money for reclaiming the land which if they do not they will spend $3 million to do it whereas DBD will spend $2 million for the reclamation of the land. The total cost of leasing the land to DBD is $5 million so they are afraid if they do not charge the $3 million, they would only make a profit of $2 million shillings. This is a business and its principle objective is to make maximum profits. In principal – agent delegation many advantages are drawn. These include improved decision-making and the efficiency of these decisions. Decisions are wholly passed to the agent who takes the problems as their own and works to towards finding viable decisions. This means that the principal only wants a particular payoff but the rest is left to the agent. In the example of BLM and DBD, the BLM can be likened to a Landlord and the DBD as a tenant. The property owner will lease the land to the tenant and pass all that concerns to it to the tenant