Essay About Types Of Agency Problem And Board Members

Ethics Essay
EthicsQuestions1:Corporate governance is the formal systems of accountability, oversight and control.Accountability refers to how close the workplace decisions are aligned with a firm’s stated strategic direction. Oversight provides a system of checks and balances that limits employees and managers opportunities to deviate. Control is the process of auditing and improving organizational decisions and actions.There are two types of agency problem. Type I agency problem appears in western markets such as United States which is mainly non-family business. There are conflict between managers (CEO) and investors (shareholders). It exists because of the disperse ownerships structures ;when no one monitors the CEO, he can make decisions based on his own interests rather than shareholders’ interest, With the problem of disperse ownership, board members don’t work at the company. CEO is king and he can take advantage of shareholders .For example he might grant contracts to his relatives at very high price compare to market price.

Types II agency problem is from eastern markets such as Hong Kong which is mainly family business. There are conflict between controlling shareholders and minority shareholders. When board members come from the same family, they tend to take care of their own interests rather than shareholders’ interest. For example, controlling shareholders can sell his own property to the company at very high price compare to market price. Because board members are family, they have high tendency to take advantage to minority shareholders.Agency problems always exist, what we can do is to mitigate them. The first solution to agency problem is incentives which mean to aligning executives incentives with shareholders ‘interests such as offer stock options to board members. The second solution is monitoring which mean to set up mechanisms for monitoring the behavior of managers. For example give reward when managers have done something good and give punishment when managers have done something wrong.Question 2There are four different types of director.