ASSIGNMENT TWO Dazzle Co. is a stock‐market listed company that manufactures personal protection equipment. At a recent board meeting of Dazzle Co., a non‐executive director suggested that the...

ASSIGNMENT TWO

Dazzle Co. is a stock‐market listed company that manufactures personal protection equipment. At a recent board meeting of Dazzle Co., a non‐executive director suggested that the company’s remuneration committee should consider scrapping the company’s current share option scheme, since executive directors could be rewarded by the scheme even when they did not perform well. A second non‐executive director disagreed, saying the problem was that even when directors acted in ways which decreased the agency problem, they might not be rewarded by the share option scheme if the stock market were in decline.

Required:

(a) Explain the nature of the agency problem in detail.

(b) Discuss the use of share option schemes as a way of reducing the agency problem in a stock‐market listed company such as Dazzle Co.