Practice question · Sort into groups
Sort each cost: is it a direct agency cost (value the agent burns) or a monitoring cost (spent watching the agent)?
Groups: Direct agency cost · Monitoring cost
- Board committee time reviewing executive decisions
- Annual external audit fees
- Luxury corporate jet for routine trips
- Compensation consultants designing the bonus plan
- CEO buys a rival mainly to run a bigger empire
Hints
- Ask whether the value was destroyed or spent on watching.
- Auditing is not a loss from misbehaviour but a cost of preventing it.
Show the answer
Direct agency cost: CEO buys a rival mainly to run a bigger empire, Luxury corporate jet for routine trips
Monitoring cost: Annual external audit fees, Compensation consultants designing the bonus plan, Board committee time reviewing executive decisions
Why
Agency costs come in two flavors: the value the divergence destroys, and the value spent policing it. Governance minimizes their sum.
Practise Corporate Governance
The app has 6 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on Corporate Governance
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