Question

1. c Agency conflicts are most likely to occur in the corporate form of organization. What is about this form of organization that attracts these problems? What are the costs of agency problems to an organization and how can they be remedied?

Answer 1

corporate form of organisation has a Characteristic of separation of ownership and the management, and this is the criteria that is leading to the agency problem as ownership is related to the shareholders of the company and management is related to the board of directors of the company, and the relationship is established between management and shareholders is that of an agent and a principal.

So it will give rise to the agency conflicts as management are always working in their own interest by inflating the profits in order to secure the jobs can increase their managerial remuneration, but they are not working in the interest of the shareholders who are the principles of management.

Cost of agency problem can be huge to an organisation and it can even lead to insolvency and bad debt as well because it can be seen in the case of the Lehman brothers, where as the management has acted in complete contrast with the shareholders interest and they had raised excessive loans at irrational rates and the company went bust.

The cost related to agency problem can be removed through a better communication and a stock related incentive scheme and performance related incentive schemes