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Please kindly explain why two bellows issues are evidence of agency problems :
1.CEO manages all day-to-day operations of the business AND NEDS only on board
2.No NED with a relevant and recent financial backgroundThank you.
Agency problems arise when the principal (here the shareholders) and agent (here, directors) might have different objectives: the agents should act in the best interest of their principals.
1 The CEO managing all day-to-day operations of the business while NEDs only serve on the board can create a situation where the CEO has excessive power and control over the company. This concentration of power can lead to decisions that may not be in the best interests of the shareholders. NEDs were ‘invented’ to monitor executive directors.
2 The absence of NEDs with a relevant and recent financial background can also contribute to agency problems. NEDs with financial expertise play a crucial role in overseeing the financial performance, decision-making and risk management of the company. Without NEDs with financial backgrounds, there may be a lack of expertise increasing the risk of financial mismanagement or misconduct.
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