In: Finance
1. The relationship between stockholders and management is an agency relationship. In such a relationship, possible conflicts of interest or agency problem could arise.
Explain five (5) control devices available to the shareholders to reduce the potential of agency problem and to ensure that management acts for the best interest of the stockholders.
Five controlling measures which are available to the shareholder to reduce the potential of agency problem are as follows-
A. Shareholder will be trying install and efficient communication system which will reduce and eliminate the communication gap with management.
B. Providing the management with compensation scale which is in relation to that of industry which will satisfy their personal interest in the organisation.
C. Providing for employee stock holders option which will provide an ownership stake for the employees of the company in the long run and they will try to maximize their interest by protecting the interest of shareholders.
D. Ensuring the management of their job in the long run and they should not be made to feel insecure about the job loss.
E. Providing a very high label of continuous channel of communication which will be providing for efficient solution of communication gap and it will reduce the communication gap between the management and the shareholders.