Question A

TechConnect Inc. is a publicly traded technology company specializing in software development and IT services. The CEO, Sarah, has been leading the company for many years and holds a significant number of shares. The board of directors consists mostly of independent directors, although Sarah has personal relationships with a few of them.

In recent years, TechConnect Inc. has been grappling with challenges in maintaining its market position due to intense competition and evolving customer demands. As a result, the board has been exerting pressure on Sarah to enhance the company's financial performance. In response to the board's demands, Sarah has initiated cost cutting measures throughout the organization. She has implemented layoffs, reduced investment in research and development, and scaled back on marketing activities. However, she has also authorized substantial increases in her own compensation package and provided generous bonuses to top executives, arguing that it is necessary to retain key talent.

Despite these efforts, TechConnect Inc.'s financial performance continues to deteriorate. Shareholders have grown increasingly frustrated with the situation and have started expressing their concerns at annual general meetings.

Upon further examination, it is revealed that Sarah has been misusing company funds for personal purposes, such as funding luxurious vacations and leasing a personal vehicle. Additionally, she has been directing business contracts to companies she has a personal stake in, even if these companies may not provide the best value for TechConnect Inc.

The board of directors has now become aware of Sarah's actions and faces a crucial decision on how to proceed. They are confronted with a dilemma: should they take action to remove Sarah from her position, potentially leading to legal repercussions, or should they continue supporting her to prevent further disruption to the company's operations."

Required:

1. Identify three factors contributing to the agency problems that emerge within TechConnect Inc.
2. Outline two potential approaches that the company could adopt to address the agency problems effectively.