Agency theory reading report

Reduction of Agency Problem/Cost

1 .Compensation packages. The managers should be sufficiently rewarded so as to attract and retain the best managers, but it should not be excessive. The managers should also be encouraged to buy stocks of the company or pay them using the stocks, so that they become also owners. This will align the interest of the managers with those of the stockholders, which is wealth creation.

2. Firing the managers who do not perform. If the managers do not achieve the objectives set, then he/she should be fired. This will motivate the managers to work hard to achieve the objectives set.

3. Threat of hostile takeovers. If managers let the stock price fall to the extent that it becomes a bargain, it will encourage a hostile takeover. When a hostile takeover occurs, the managers are most probably fired. Therefore, the managers will be motivated to work hard to improve the shareholder stock price and, hence, improve stockholder wealth.

4. Monitoring. The stockholders can monitor what the managers do by requiring reports, holding meetings, both internal and external auditors, board of directors, financial markets, bankers, credit agencies.