Question

CHAPTER 13: FINANCIAL MANAGEMENT (14TH EDITION)

4. What is ‘entrenched management’? Is this good for the shareholders? Why or why not? What corporate charter provisions allow entrenched management to continue?

5. How can a company’s board of directors help mitigate the agency conflict?

Answer 1

Entrenched management occurs when due to certain circumstances management gets so much authority, influence and power that they work for their own benefits rather than the benefit of shareholders. It is not good for shareholders because the management in this situation starts working for their own salaries and bonuses rather than the profits of shareholders who are the real owners. The charter provisons which may lead to continuation of such management could be the directors who decide the compensation level of managers or the type of organization whether profit or non- profit.

5.) The company's board of directors can mitigate the agency conflicts by these steps :-

a) by linking the management compensation and bonuses with the share value of shareholders so that they work in their best interest.

b) by recruiting independent directors for compensation and observations committee.

c) by educating them about ethics and issuing regulatory courses.

d) by removing the problem of asymmetric information and moral hazard

e) by promoting a culture which promotes more ethical conduct.

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