Question

CPA Inc. is a publicly traded company. The stockholders of this company delegate the authority to make decisions for the company to a CEO named Joaquin. The stockholders expect Joaquin to make decisions that will benefit the company. However, Joaquin begins to find ways to maximize his total compensation, which hinders CPA's performance. This scenario reflectsA) value creation problems.B) principal-agent problems.C) inside director-outside director problems.D) adverse selection problems

Answer 1

Answer:

The answer is option C) Since Joaquin began to find ways to maximize his total compensation, which hinders CPA's performance, inside director-outside director problems is experienced.

Explanation:

A corporate entity like CPA Inc. sometimes appoint an outside director to create a stronger corporate identity. This is because it is believed that an outside directorate sees the bigger picture more clearly since they are looking from the outside in.

The outside directorate also help to check the excesses of the inside director.

The inside director is a member of the board employed to work as a manage staff.

Since Joaquin is named CEO in CPA Inc and given the authority to make decision  by the stockholders of the company. He is the inside director.

His quest for more pay that is due him will definitely cause the outside directors to raise an eyebrow which will lead to inside director-outside director problems.