1. By,
Nidhish Thampi
P11138
PGDM – A

2.  Agency problem is the likelihood that
managers may place personal goals
ahead of corporate goals.
 A characteristic feature of corporate
enterprises is the separation between
ownership and management.
 Thus, with the objective of survival,
management would aim at satisfying
instead of maximizing shareholder’s
wealth.

3.  The agency problem can be prevented by:
 Market Forces
 Agency Costs
Market Forces:
It is of two types:
Behaviour of security market participants
Hostile Takeovers

4. • Behaviour of security market participants:
 The participants include institutional
investors(mutual funds, insurance etc.) actively
participate in management. They use their voting
rights to replace more competent management.
• Hostile takeovers:
 It is the acquisition of the firm by another firm that is
not supported by management. The constant threat
of takeover motivate management to work for
maximising owner’s wealth.

5.  These are the costs borne by
shareholders to prevent agency problem
as to maximise owners wealth.
 They have to incur 4 types of costs:
Monitoring
Bonding
Opportunity
Structuring

6.  Monitoring the activities of the management to
prevent satisfying and maximising owner’ wealth.
 It relates to the payment for audit and control
procedures to ensure that management is working
for maximising owner’s wealth.
 Bonding protects the owners from the
consequences of dishonest acts by
management/managers.
 They firm pays to obtain a fidelity bond from a
third party bonding company to compensate for
financials loses due to dishonest acts.

7.  Opportunity costs are those which
results from the inability of the firm to
respond to new opportunities.
 Due to organisational structure, hierarchy
etc. the management faces difficulties in
seizing profitable investment
opportunities.
 Structuring expenditure relates to
structuring managerial compensation to
maximise owner’s wealth.

8.  It is of two types:
1. Incentive Plans
2. Performance Plans
 Incentive Plans:
 They tie management compensation to sare
price.
 The most widely used plan is stock options
which allows management to acquire shares
at special prices. Higher price will result in
larger management compensation.

9.  Performance Plans:
 These plans compensate management on
the basis of its proven performances.
 Performance shares are given to
management for meeting the stated goals
 Another type, cash bonuses – cash
payments are given for achievement of
the stated performance goals.

10. Thank you...!!