Sizes and Types of Firms

Question 1

what are the different types of business organisation

Answer 1

-public limited companies– shares are traded on the stock market
-private limited companies– shares are privately owned and traded
-nationalised corporations– where the gov is the majority/sole shareholder
-social enterprises– where profits are reinvested for social projects
-co-operatives and partnerships– each member of the business has an equal state. they are employee owned firms

Question 2

examples of uk nationalised businesses

Answer 2

-network rail
-channel 4 tv
-national air traffic service (NATS)
-ordnance survey
-royal mint
-NHS
some train operating companies like Scotrail `

Question 3

what is the Principal Agent Problem

Answer 3

when there is a conflict of objectives between the owners (principal) and the managers (agents), who is entrusted to make decisions and take actions that will benefit the principal
the agents incentives may not perfectly align with those of the principal leading to a conflict of interests

Question 4

why might the principle agent problem lead to rising costs and inefficiency in firms

Answer 4

-managers may be profit satisficing
-so they are earning enough profit to keep shareholders happy and also focus on other objectives
-this may mean that managers may not keep a close enough eye on costs and allow X-inefficiencies to arise

Question 5

how might the principle agent problem contribute to poor decision making by managers

Answer 5

-senior managers might pursue aggressive growth in size and market share - likely through mergers and takeovers for more power and prestige or personal bonuses
-this might not be in the shareholders interest as it could lead to: diseconomies of scale, ill-advised mergers and takeovers may lack expected benefits, excessive risk taking and cost-cutting may make short term profit but worsen long term performance

Question 6

what are 2 solutions to the principle agent problem

Answer 6

-share bonus schemes
-managers get rewards if profits
exceed a target
-but high dividends in short run
may mean a lack of invest and
growth
-it may encourage high risks in
short term leading to losses in
the long term
-non-executive directors on the
board of the company
-represent the wishes of owners
but are not part of the day to day
running of the business so are
unbiased
-senior managers usually control
who is proposed to be on the
board and there is a danger of
them being close friends and
therefore biased