3.2.2 Divorce of ownership from control

• What does the divorce of ownership from control refer to in large corporations?

  Separation of ownership and control
• Shareholders provide capital, while managers make strategic decisions in large corporations.


  True
• The principal-agent problem arises when managers act in the best interests of shareholders.

  False
• Provide an example of an agency problem in a large corporation.

  Managers investing in personal projects
• The divorce of ownership from control can lead to an agency problem.agency
• What is the purpose of increased shareholder oversight in mitigating the agency problem?

  Hold managers accountable
• In the divorce of ownership from control, shareholders directly manage the business operations.

  False
• In large corporations, the key stakeholders are shareholders and managers.
• The principal-agent problem arises when managers act in the best interests of shareholders.

  False
• What are three strategies to mitigate the agency problem?

  Performance-based compensation, increased shareholder oversight, managerial ownership
• What is a financial risk associated with managerial ownership?

  Entrenchment
• Who exercises control in a large corporation under the divorce of ownership from control?

  Professional managers
• Managers are motivated by operational efficiency, growth, salaries, and career advancement
• The agency problem involves a conflict of interest
• What is the primary conflict of interest in the divorce of ownership from control?

  Shareholders vs. managers
• Performance-based compensation aligns manager pay with shareholder returns.


  True
• Match the consequence with its explanation:

  Suboptimal Decision-Making ↔️ Managers prioritize personal benefits

  Excessive Executive Compensation ↔️ Managers award high salaries

  Lack of Accountability ↔️ Managers lack responsibility to shareholders
• Match the concept with its action:

  Ownership ↔️ Held by shareholders

  Control ↔️ Exercised by managers
• What might managers prioritize over shareholder interests?

  Career advancement
• Match the key element of the agency problem with its explanation:

  Principal ↔️ Hires an agent

  Agent ↔️ Acts on behalf of the principal

  Conflict of Interest ↔️ Interests of principal and agent diverge
• What is a potential drawback of performance-based compensation?

  Short-term focus
• In large corporations, ownership is held by shareholders
• What is the primary motivation of shareholders in a large corporation?

  Maximize investment returns
• What is the agency problem in the context of large corporations?

  Misalignment of interests
• Consequences of the agency problem in large corporations

  1️⃣ Conflicts of Interest

  2️⃣ Suboptimal Decision-Making

  3️⃣ Excessive Executive Compensation

  4️⃣ Lack of Accountability
• Arrange the following consequences of the agency problem in a logical order:

  1️⃣ Suboptimal decision-making

  2️⃣ Excessive executive compensation

  3️⃣ Lack of accountability
• Managerial ownership encourages managers to own a stake in the company.
• What role do professional managers play in corporations with the divorce of ownership from control?

  Exercise control
• What is the primary motivation of shareholders in a corporation?

  Maximize investment returns
• The agency problem arises when the interests of the principal and the agent do not align.
• Suboptimal decision-making occurs when managers prioritize personal benefits.