Final answer:
The correct answer is option d. agency costs can be controlled through specific managerial practices.
Step-by-step explanation:
According to the agency theory, there is a relationship between principals, such as shareholders or family owners of a business, and agents, or the executives and nonfamily managers who run the company. As decision-making becomes more complex with the addition of nonfamily managers, transaction costs, which are the costs associated with making decisions, tend to increase. This is analogous to the challenge of deciding where to dine out with a large group of people; more individuals can complicate and lengthen the decision process, thereby raising costs.
To manage these costs, the company must establish mechanisms to monitor and control the decision-making of executives, as family members may do with family business managers. This monitoring is designed to align the interests of managers with those of the principals to ensure that operational expenditures do not diminish the firm's profitability unnecessarily. Another concept at play is the efficiency wage theory, which suggests that higher wages can lead to increased productivity by giving workers strong incentives to perform well and stay with the employer, thereby reducing hiring and training costs for the company.
Therefore, answer option (d) is the correct one: agency costs can be controlled through specific managerial practices, including efficient wage policies and monitoring mechanisms. This underscores the importance of strategic managerial decision-making to mitigate agency costs and increase the overall efficiency of a business.