3.1 section b - demergers

what is the principle agent problem

the principle agent problem is when the interests of a companies owner (principle) are not aligned with the managers (agents) who make the decisions on their behalf

how can we overcome the principle agent problem

• align incentives - offer incentives based on the companies performance. e.g executives are given stock options or performance based bonuses

• increased transparency - this can mitigate information asymmetry between managers and owners. e.g reports disclosures

• appoint independent directors - who have no ties to management check on decisions of managers

what is the difference between public sector and private sector

private sector - businesses that are operated and owned by private individuals and companies ( for profit )

public sector - run on behalf of the public or by the government usually not “for profit”, exist to provide goods and services to the public using public funds 

what is a not for profit organisation

an organisation run on commercial lines but has strong welfare and environmental ains rather then existing to maximise profit for private investors.

key word - demerger

a de-merger is when a firm decides to split into separate firms

3 reasons for a firm to implement a de-merger

• focus on the core value - core competencies by separating fimrs into core and non core.

• more value - increased value - increase shareholder value and improve overall financial performance

• regulatory requirements - comply with rules

impact of demergers on the workers

adv - increased productivity + job satisfaction

dis - lower job security - potential job loss

impact of demergers on a business

adv - specialisation + efficiency

dis - smaller business - less economies of scale may limit the efficiency

impact of demergers on consumers

adv - cost lower quality increases more choice

dis - loss of market power, price may not change