Question

Q/Explain how agency conflicts arise in an organization.

Q2/What are the appropriate solutions to reduce agency costs?

Please use a new word!!!!

(I need the answer as text not as a picture please)

Answer 1

Q1: Agency conflicts arise in an organization , when the managers who are appointed as agents of the shareholders begin to think of their own interests rather than the interests of the organization.

When the managers think of their personal interests above that of shareholders. Then conflicts arise within the organization. Sometimes managers take up projects only to increase the size of the firm without taking into account the effects of the project on the profitability of the organization, as the larger the size of the organization , higher would be the compensation of the managers.

Q2: The solutions to reduce the agency costs are , attaching the compensation of the managers to the stock price. In such a case the managers will take appropriate measures to increase the share price of the organization, thus aligning with the interests of the shareholders.So , by changing the compensation structure the agency costs can be reduced.

The managers were also made to own the stock of the organization,thus also motivates them to work towards the best interests of the organization and take measures to increase the share price.