Question 1. 10 points) Both Berkley and Oakley are large public corporations wit

Question

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

a. Would the agency problem be more pronounced for Berkley or for Oakley? Explain.

b. Would agency costs likely be higher for Berkley or Oakley? Why?

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

d. Discuss a major advantage and a major disadvantage to a centralized approach such as Oakley uses.

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

Explanation / Answer

oth Berkley and Oakley are large public corporations with subsidiaries throughout the world.
Berkley uses a centralized approach and makes most of the decisions for its subsidiaries. Oakley uses a decentralized
approach and its subsidiaries make many of their own decisions.
a. Would the agency problem be more pronounced for Berkley or for Oakley? Explain.
Agency problems would be more pronounced(prominent) for Oakley as compared to Berkley.
Because Decentralization facilitates more efficient use of local information but also can lead to agency problems and commitmentfailures.
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b. Would agency costs likely be higher for Berkley or Oakley? Why?
Agency costs would be higher for Oakley as compared to Berkley Because decentralized management increases agency

costs but may result in better decisions
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c. Discuss a major advantage and a major disadvantage to a centralized approach such as Berkley uses.
Advantage:Centralized reduces agency costs because it gives parent more control
Disadvantage:Downside is that it does not result in better decision making as local managers may be better

informed about their particular subsidaries
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d. Discuss a major advantage and a major disadvantage to a centralized approach such as Oakley uses.
Advantage:It results in better decision making as local managers may be better informed about their particularsubsidaries.
Disadvantage:-It also can lead to agency problems and commitment failures.
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e. Which is better, a centralized or decentralized approach? Explain .

Every organization must establish whether its decision-making policies are centralized or
decentralized. Highly centralized companies tend to have more bureaucratic traits, while highly decentralized
companies tend to appear more out of control. Both extremes appear engulfed with inefficiencies and
waste. High performance work systems seem to have more decentralized decision-making features, yet their
culture, formed around their philosophy and values, is highly centralized. Creating a centralized philosophy
and value system allows employees to become more empowered to make their own decisions, leading to
decentralization will be the best approach which can1 of considered leading to win-win situation

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