i) Type of Conflict:
This type of conflict is known as the Agency Problem, where the interests of management (agents) conflict with the interests of shareholders (principals).

Marks: 2

ii) Factors Contributing to the Agency Problem:

1. Goal Conflict: Management might pursue goals that maximize their personal benefits rather than those of the shareholders, leading to goal incongruence.
2. Separation of Ownership and Control: Shareholders own the company but do not manage its day-to-day operations, leading to potential conflicts of interest with management.
3. Information Asymmetry: Management has more access to the company’s financial and operational information than shareholders, which can lead to manipulation and self-serving decisions.

Marks: 4

iii) Strategies to Mitigate the Agency Problem:

1. Internal Firings or Dismissals: Management can be fired, dismissed, or warned with layoffs for non-performance, keeping them motivated to act in shareholders’ best interests.
2. Use of External Analysts and Experts: External consultants can monitor and assess management’s performance to ensure it aligns with shareholder interests.
3. Performance-Related Incentives: Implementing executive share options or compensation linked to the performance of the share price ensures that management’s interests align with those of shareholders.
4. Performance-Related Pay: Management’s compensation and bonuses are linked to the company’s performance, such as share price increases, which encourages management to maximize shareholder value.
5. Use of Market Forces: Institutional investors can exercise strong voting powers to replace non-performing management, ensuring that management prioritizes shareholder interests.
6. Monitoring: Performance of management can be monitored through schemes set up by shareholders, or by hiring external consultants and auditors to perform this role.

Marks: 4

Total Marks: 10