duaali

After reading the following case, please answer the following questions:
1. Why does the agency problem arise?
2. What is the cost of the agency problem?
3. How to minimize the agency problem?

CASE STUDY ON AGENCY PROBLEM ABC
Company started operations in early 1970. The company produces specialized items for
manufacturing cars. Most of the raw materials used are imported from Brazil because the cost is low
and the labor is very cheap. The CEO for ABC Company, Mr. Rodriguez, makes every attempt to
keep the cost at the lowest. From 1970 to 2000 net income has increased at a rate of at least 25%
per year. There are around 20,000 shareholders that hold ABC Company shares. Shareholders are
very happy with the company's performance. Mr. Rodriguez always held a meeting with the Board of
Directors to inform them of any decision involved in the company. As such the BOD is very happy
with the company performance and Mr. Rodriguez managing style. Every year, the staff received a
cash bonus of around 2 to 3 times of their salary and Mr. Rodriguez received many incentives from
the company including cars, houses and cash. However, at the end of 2001, the cost of raw material
increased because of the SARS virus attack in Brazil. The sales for the year were also reduced. By
September 2001, Mr. Rodriguez held an emergency meeting with all the staff. It is estimated that the
income for the year will be reduced. By January 2002, after the preparation of the financial
statements, net income showed a decrease of around 45% from last year. Mr. Rodriguez demanded
the treasures and the controller to do something with the figures. During the BOD meeting in April
2002, the company announced a 15%increase in income and declared a dividend of around 5%
higher than last year. The shareholders reacted positively to the announcement and started buying
more shares of the company. For the next five years, the company continued to decrease in income
but provided good news to the shareholders and gave shareholders higher profit. In 2008, the BOD
requested for the company to change the auditor for the company. After the auditing process, the
new auditor revealed that the company is in the state of bankruptcy and there is zero balance cash
in the bank account. One month after that the company was forced to close down. Shareholders
were surprised with the announcement and lost all their money. The employees lost their jobs and
many creditors couldn't claim their money. Shareholders are currently suing Mr. Rodriguez and the
company for their losses.

You have been invited by the Education ministry for facilitating the Academic Quality award process design for different Business schools in India offering the two-year MBA program. 

(a) Create a Quality assessment framework for Business schools using relevant and Critical to Quality (CTQ) academic factors along with their importance level? 

(b) Provide two key questions under each CTQ identified for the academic health scoring for the factor. 

(c) Would you always recommend giving the award every year to the top three rankers? Justify your logic. 

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