Which of the following could be a potential solution to the agency problem between managers and...

Which of the following could be a potential solution to the agency problem between managers and shareholders?

		Giving the managers a part of the company through stock-based compensation
		Having fewer managers
		Having more female managers than male managers
		Having the managers meet more often
		Paying the managers higher cash wages

Expert Solution

Answer: Giving the managers a part of the company through stock-based compensation

Explanation:

Shareholders' wealth maximization is the most appropriate goal of a firm. When it is done, the shareholders interests are protected and there is no agency problem or it is insignificant.

Agency problem arises when managerial decisions do not fully contribute to shareholders' wealth maximization. The reason may be that managers have their individual goals to achieve; one of which may be ill devised performance reward schemes.

To make managers conform to the goal of shareholders' wealth maximization, the best option is then to make them shareholders of the company. When they hold shares in their own names, they would be more inclined to have the sharholders' interest as the primary objective, when they take decisions.

All the other options would provide no motivation to protect shareholders' interest.

jeff jeffy answered 1 year ago

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