Question 1. 10 points) Both Cameron and Daley are large public corporations with

Question

Question 1. 10 points) Both Cameron and Daley are large public corporations with subsidiaries throughout the world. Cameron uses a centralized approach and makes most of the decisions for its subsidiaries. Daley uses a decentralized approach and its subsidiaries make many of their own decisions.

a. Would the agency problem be more pronounced for Cameron or for Daley? Explain.

b. Would agency costs likely be higher for Cameron or for Daley? Why?

c. Discuss a major advantage and a major disadvantage to a centralized approach such as Cameron uses.  

d. Discuss a major advantage and a major disadvantage to a decentralized approach such as Daley uses.  

e. Which is better, a centralized or decentralized approach? Explain.

Explanation / Answer

(a) Ageny problem wll be more pronounced for Daley because Daley expect its subsidiries to act in Daley best interest, but the decision making is decentralized so it completely based on subsidiaries that how much they protect the interest of Daley. On the other hand Cameron is using Centralized approach, so naturally it protect it's interest at the time of making the policies and taking the decisions.

(b) Agency cost will be higher for Cameron because Cameron has to spend more on ensuring that its subsidries are protecting its interest or not in the best possible manner.

(c) Major advantage of centralized approach is consistency in decision making for complete organization and disadvantage is adoption and implementation of centralized policies and procedures and delay decisions.

(d) Biggest advantage is rapidly diversification of organization and developmeny of management and disadvantage is high cost and lack of managerial capicity.

(e) Both are better if a mixed model is adopted.

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