Question

Which of the following forms of business organization is likely to suffer most from the principal agent problem between the owners and managers of the business:
A. Partnerships
B. Corporations
C. Proprietorships
D. All are equally likely to suffer from the principal-agent problem

PLEASE HELP! thank you!

Answer 1

It's
(B) corporations

Answer 2

A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members.
Whereas Partnerships and Sole proprietors don't.

Answer 3

Principal-Agent conflicted interests are more tightly regulated under corporate governance legal regimes, partnerships are more likely to give rise to this issue because they are essentially a common law form of business structure.

Answer 4

Corporations are more likely to suffer from principle agent problems because the owners of the corporation (the shareholders) are not the managers of the corporation. Much of modern corporate payments strategies (stock options, etc) are designed to aline the interest of the owners and the managers. Time frame is still a problem, hence the claw back of bonuses for decisions that go bad.