Sonia Tan, a fund manager at institutional investor Sentosa House, was reviewing the annual report of one of the major companies in her portfolio. The company, Eastern Products, had recently undergone a number of board changes as a result of a lack of confidence in its management from its major institutional investors of which Sentosa House was one. The problems started two years ago when a new chairman at Eastern Products (Thomas Hoo) started to pursue what the institutional investors regarded as very risky strategies whilst at the same time failing to comply with a stock market requirement on the number of non-executive directors on the board. Sonia rang Eastern's investor relations department to ask why it still was not in compliance with the requirements relating to non-executive directors. She was told that because Eastern was listed in a principles-based jurisdiction, the requirement was not compulsory. It was simply that Eastern chose not to comply with that particular requirement. When Sonia asked how its board committees could be made up with an insufficient number of nonexecutive directors, the investor relations manager said he didn't know and that Sonia should contact the chairman directly. She was also told that there was no longer a risk committee because the chairman saw no need for one. Sonia telephoned Thomas Hoo, the chairman of Eastern Products. She began by reminding him that Sentosa House was one of Eastern's main shareholders and currently owned 13% of the company. She went on to explain that she had concerns over the governance of Eastern Products and that she would like Thomas to explain his noncompliance with some of the stock market's requirements and also why he was pursuing strategies viewed by many investors as very risky. Thomas reminded Sonia that Eastern had outperformed its sector in terms of earnings per share in both years since he had become chairman and that rather than question him, she should trust him to run the company as he saw fit. He thanked Sentosa House for its support and hung up the phone. Required (a) Explain what an 'agency cost' is and discuss the problems that might increase agency costs for Sentosa House in the case of Eastern Products. (b) Describe, with reference to the case, the conditions under which it might be appropriate for an institutional investor to intervene in a company whose shares it holds. (c) Evaluate the contribution that a risk committee made up of non-executive directors could make to Sonia's confidence in the management of Eastern Products. (d) Assess the opinion given to Sonia that because Eastern Products was listed in a principles-based jurisdiction, compliance with the stock market's rules was 'not compulsory

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Ans a Agency Costs are expenses for shareholders to monitor the activities of the companys agents ie directors Agency costs are generally considered to be exceeding existing analytical costs and are c... View the full answer