Asked by Svetlana Brenner on Jul 16, 2024
Verified
Which of the following is (are) effective in controlling the agency problem?
A) Tie a large part of managements' compensation to company profit
B) Offer numerous perquisites
C) Employ auditors to periodically review company books
D) Both a and c
Agency Problem
A conflict of interest arising between decision-makers (agents) and the owners (principals) due to differing goals.
Managements' Compensation
The financial and non-financial rewards given to corporate management, which may include salary, bonuses, stock options, and other benefits.
Auditors
Professionals or firms appointed to review and verify an organization's financial records and statements to ensure accuracy and compliance with accounting standards.
- Recognize the interested parties and tackle the issue of agency in the management of corporations.
Verified Answer
MB
Mykel BinderJul 22, 2024
Final Answer :
D
Explanation :
A - Tying a large part of management's compensation to company profits aligns the interests of management with those of the shareholders. This makes them more likely to work towards maximizing shareholder value.
B - Offering numerous perquisites does not necessarily align the interests of management with that of the shareholders. These are usually unrelated to the financial performance of the company and may, in fact, increase costs for the company.
C - Employing auditors to periodically review company books serves as a check on management and reduces the likelihood of fraudulent activity. This enhances the confidence of shareholders and investors in the company.
D - Both tying management compensation to company profits and employing auditors to periodically review company books are effective in controlling the agency problem as they align the interests of management with those of the shareholders and limit the ability of managers to act in their own interest rather than in the best interest of the company and its shareholders.
B - Offering numerous perquisites does not necessarily align the interests of management with that of the shareholders. These are usually unrelated to the financial performance of the company and may, in fact, increase costs for the company.
C - Employing auditors to periodically review company books serves as a check on management and reduces the likelihood of fraudulent activity. This enhances the confidence of shareholders and investors in the company.
D - Both tying management compensation to company profits and employing auditors to periodically review company books are effective in controlling the agency problem as they align the interests of management with those of the shareholders and limit the ability of managers to act in their own interest rather than in the best interest of the company and its shareholders.
Learning Objectives
- Recognize the interested parties and tackle the issue of agency in the management of corporations.