Answer:There are several mechanisms that can be used to mitigate potential agency problems:
Performance-based compensation: This is a mechanism where the compensation of the agent is tied to the performance of the company. This incentivizes the agent to work in the best interest of the company.
Monitoring: This mechanism involves keeping a close watch on the actions of the agent. The monitoring can be done by the principal or an external party. This helps to ensure that the agent is acting in the best interest of the principal.
Independent auditors: This is an external mechanism where an independent auditor is hired to verify the accuracy of financial statements and other company reports. This helps to ensure that the agent is not misrepresenting the company's financial performance.
Board of directors: The board of directors is responsible for overseeing the actions of the management team. They are supposed to represent the interests of the shareholders and ensure that the management team is acting in the best interest of the company.
Shareholder activism: This is when shareholders use their voting power to influence the actions of the management team. This can be done by voting against the appointment of certain directors or by proposing changes to the company's bylaws.
Regulations and legal system: The legal system can be used to hold the agent accountable for any actions that are not in the best interest of the principal. Additionally, regulations can be put in place to prevent certain actions by the agent that are not in the best interest of the principal.
Step-by-step explanation: