Question

Summarize the four ways to mitigate an agency conflict.

Answer 1

Agency conflicts arises when managers takes decisions in their interests rather than the wealth maximization for the shareholders.

We can aviod the conflicts by taking necessary steps:

1. Making managers more interested in the company by issuing ESOPs and keeping a limit of 5 years to convert them So, managers will take decisions in the long term benefit for the company.

2. Having a board of atleast 75% comprises of independant directors for unbaised decision making.

3. CEO and chairman of the board should not be a single person to avoid any cconflicts of interests

4. To have a contract design framework between the principal and the agent to address issues of information asymmetry, stimulate the agent’s incentives to act in the best interests of the principal, and to determine procedures for monitoring agents.