Final answer:
The agency problem in takeovers relates to conflicts between management and shareholders, which golden parachutes can help mitigate by aligning interests. However, golden parachutes can also create new agency issues. Shareholders elect a board of directors to manage such conflicts.
Step-by-step explanation:
The agency problem alluded to here refers to a potential conflict of interest between the management of a firm (the agents) and its shareholders (the principals) during a takeover. This problem arises because management might have personal interests that clash with those of the shareholders, such as the desire to retain their positions and resist takeovers that could lead to their displacement, even if the takeover would benefit the shareholders. Golden parachutes are arrangements that provide executives with significant benefits if they are dismissed as a result of a takeover, hence aligning the interests of management with shareholders by reducing the managers' resistance to beneficial takeovers.
However, golden parachutes can themselves create an agency problem by offering overly generous exit benefits to executives at the expense of the shareholders. This can diminish the incentive for executives to run the company prudently, leading to a form of factionalism where executives might prioritize their own financial security over the company's performance. Moreover, golden parachute arrangements can sometimes contribute to the free rider problem, where the benefits of executive exit bonuses are disproportionately enjoyed by the leaving executives, while all shareholders bear the cost.
Shareholders choose company managers indirectly by electing board of directors who are responsible for high-level oversight and decision-making, including the appointment of company managers. These decisions are made against the backdrop of imperfect information, where the parries do not have equal knowledge about the company's prospects, further complicating the shareholders' oversight role.