Problem:
Both Company A and Company B are large public corporations with subsidiaries throughout the world. Company A uses a centralized approach and makes most of the decisions for its subsidiaries. Company B uses a decentralized approach and its subsidiaries make many of their own decisions.
Required:
Question 1: Would the agency problem be more pronounced for Company A or for Company B? Explain.
Question 2: Would agency costs likely be higher for Berkley or Oakley? Why?
Question 3: Discuss a major advantage and a major disadvantage to a centralized approach such as Company A uses.
Question 4: Discuss a major advantage and a major disadvantage to a decentralized approach such as Company B uses.
Question 5: Which approach is better, a centralized or decentralized approach? Explain.
Note: Solve the problem and show all work.