- 15 Marks
FM – Nov 2018 – L3 – Q7 – Corporate Governance and Financial Strategy
Analyze potential agency conflicts between company owners and managers and methods to mitigate these issues.
Question
Agency theory was developed by Jenson & Meckling (1976), defining the agency relationship as a form of contract between a company’s owners and its managers, where owners appoint agents (managers) to manage the company on their behalf. As part of this arrangement, owners delegate decision-making authority to management. In this relationship, owners expect agents to act in their best interest.
Required:
a. Agency conflicts may arise in various ways. Discuss four of these conflicts. (9 Marks)
b. State four methods by which problems arising from these conflicts could be reduced. (6 Marks)
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