Agency problems in firms.

1. Describe why publicly-held firms have an “agency problem.”

The agency problem in publicly held companies is experienced when the agents who act as the management of the business have personal interests that go against the interests of the firm. These agents use the facilities of the company for their benefits at the expense of the stakeholders. For instance, the management team may award themselves benefits out of the firm’s profits and report fewer profit margins to the stakeholders. This way the board of directors, the speaker, and the management team will be engaged in conflict.

• Identify the main mechanism used to deal with the agency problem.

The board of directors that is charged with overseeing the operations of the corporation or organization handles the agency problem. The board of trustees is in place to ensure that the management team has the interests of the stakeholders first before their own. The board of directors determines whether the management team that is in place is well capable of running the company or not. It also takes action regarding the agents and oversees promotions, hiring and firing of the agents accordingly.

• How is boards of directors composed? What (allegedly) makes boards more independent? What makes boards less independent?

The board of directors is either elected or appointed. A board is more independent when employed outside the company compared to when inside the enterprise. It also means that the chairman, in this case, is not the CEO. It goes on to improve the functionality of the board in overseeing the operations of the firm. This ensures that the board members are keen to note what in the firm is not being done according to the guidelines.

The board of directors may, however, be less independent when it is employed in the firm. A board that operates within the corporation. In most cases if not all, the insiders’ board of directors has the chairman being the CEO of the firm. When the CEO is the chairman of the board, he controls both the board and the corporation as well.

• How are CEOs compensated in order to reduce the agency problem?

The compensation of the CEO is done in paying them the right salary depending on the market level of the firm. The CEO compensation includes a guaranteed salary, cash bonus and in some cases stock options as well as restricted stock plans among others. When the CEO is given befitting compensation, then they are in a position to ensure that his firm performs as per the guidelines put in place.

Works cited.

 Neokleous Christina, Executive Remuneration as a Corporate Governance problem, 2013