1. Corporate governance and agency theory

Question 1

What is the agency problem

Answer 1

Ownership vs control

When mangers don’t own the business

Question 2

What were the problems in agency problems

Answer 2

Managers goals differ from shareholders
There is a divergence of ownership and control
So SHW is no longer maximised

Question 3

Monitoring vs rewarding

Answer 3

Monitoring = expensive in time and money
Who should pay for it ? Large stake holders while smaller ones free ride ?

Rewarding
Tying rewards to profit may result in ST gain costing LT growth
But if they are given shares in the form of bonuses their goals are aligned with shareholders

Question 4

What is corporate governance

Answer 4

Accountability system with the aim to address this issue
Leadership- board collectively responsible
Effectiveness - only the best skilled people for job
Remuneration- pay attractive enough but not overpay
Relations with shareholders - for a mutual understating