Question

Give an example of how a firm might attempt to resolve the agency problems

Answer 1

Agency problem of a firm is considered as the agents of the company or organisation used their authority to attain their own benefits. There is a disagreement exist between the agents and the principles. If the interest of the stockholders and the board of directors were not aligned in proper manner; there is a chance for the existence of conflict between them. All of the stockholder, managers and organisers have their own interest and preferences. Most of the decisions were taken on the basis of generating profit both in short run and long run. The board of directors has different opinion from the shareholders. The board of directors has the power to remove the executives.
If a company consist of shareholders, organisers, board of executives and managers. Each of them was function for their own benefits. The managerial compensation can be functioned efficiently to resolve this agency problem. These are the incentive mechanism used create good performance of the management. If the management function smoothly, the agency problem will most probably resolve. These incentives will attract the managers and harmonize the managerial actions with respect to the interest and preferences of shareholders. Sales, profits, current value of expected cash flows and other value added measures were used under this scenario.