In the 1930s, economists Adolf A. Berle and Gardiner C. Means expressed concern that managers with relatively little ownership interest might demonstrate a suboptimal focus on transitory short-term profits rather than durable long-run value. Berle and Means also voiced concern for value-reducing risk avoidance on the part of management-controlled firms.
A. In general, describe the “agency problem” referred to by Berle and Means. Then, specifically describe how inefficient risk avoidance by top managers could be a problem.
B. What corporate governance mechanisms are commonly employed to combat the agency problems feared by Berle and Means?