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Eliminating Agency Problems

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Please answer the question below and explain your reasoning.

The CEO of Entitled Ltd. has been focused on increasing the size of the firm and maximizing current profits. Your friend, aware of your expertise in the field of finance, asks you if the CEO's actions are creating an agency problem, and if so, asks about options that are available to the shareholders to resolve this problem. How would you answer your friend?

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Solution Summary

The CEO is growing the firm and maximizing current profits. There is an agency problem that exists. The steps to best eliminate the agency problem are examined.

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Financial Forecasting Advice - Agency Problem

The CEO of Entitled Ltd. has been focused on increasing the size of the firm and maximizing current profits. Your friend, aware of your expertise in the field of finance, asks you if the CEO's actions are creating an agency problem, and if so, the options that are available to the shareholders to resolve this problem. How would you answer your friend?

AN agency problem occurs when a principal hires an agent, the CEO in this case, to perform certain task and a conflict arises because of a conflict of interest between the principal and agent's needs. The two main agency relationships: managers and creditors and managers and stockholders. In this case, the agency relationship is between the CEO and the stockholders.

In the ...

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