This raises at least one theory problem and one practical problem. The theory problem relates to the growing belief that employees should be given a direct stake in the profitability and value creation of the business, and that by aligning the self-interests of the employees with the interests of the shareholders, the shareholders wealth will be increased. This employee ownership model seems to be correlated with the success of the technology industry generally in recent years, as well as such other notable cases like General Electric. The theoretical question is whether agency costs are a problem or whether they are in a sense part of the solution. The practical issue from all of this has to do with the way that large companies actually operate.
Most large companies are a collection of smaller business units.
The problem from a risk finance perspective is that while the overall corporation may be able to retain a large uninsured loss, that loss normally will be charged to the business unit from which it arose. The fact that the risk retention capacity of the overall corporation exceeds the risk retention capacity of the individual business units comprising the corporation creates some opportunities in the area of risk finance. These opportunities arise from the question of whether the company should try to do anything to manage the financial impact of risk on the company s internal economy. The first set of opportunities relate to how mangers within the firm can organize a program to manage risk in a proactive fashion that helps to both identify and control risk. A common approach is to create a framework of internal transfer pricing that permits risk exposures of a business unit to be transferred, for a price, to a central risk financing unit.