Question

1. A Corporation can minimize agency problems with good Corporate Governance by
   1. Seeking only highly qualified members for its Board of Directors
   2. Providing complete and accurate information to shareholders
   3. Employing the services of professional auditors to review and opine upon their financial statement
   4. All of the above

Answer 1

Solution.>

The agency problem is a situation in which agents of an organization (e.g. the management) use their authority for their own benefit rather than that of the principals (e.g. the shareholders). The agency problem also refers to a simple disagreement between agents and principals.

Agency problems are most prevalent when there’s a disparity in knowledge between the agent and the principal. It’s too easy and too tempting for the agent to exploit the knowledge gap for personal gain. When agent-principal relationships arise in your business, practising full transparency can help close the knowledge gap and prevent the agency problem from emerging.

The correct option is (B) ie. Providing complete and accurate information to shareholders.

Option A and C does not guarantee us that the agent will not work for his personal gain rather than working for principal.

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