Question

Define an agency relationship. What major agency problem do corporations encounter? What can be done to help minimize this problem?

Answer 1

Agency relationship is the relationship between the principal and the agent in which agent will be working in interest of the principal and he will be appointed by the principal for doing work in place of the principal so agent should always be prioritising the interest of the principal and he should not be prioritising his own interest before the principles interest.

Agency problem which are reflected in an organisation is related to conflict between the shareholder and the manager because shareholder are always the owner of the company and they are deemed to be the principal of the manager so manager are the agent of the shareholder and they should be working in best interest of the shareholders.

Agency problem will be incurred in the organisation when there will be excess compensation which will be paid to the managers and there will be other decisions which are being taken against the interest of the shareholders because they will be reducing the shareholders wealth so it would be leading to arising of the agency problem.

There has to be a proper channel of communication between managers and the shareholders and shareholder can also issue them with stock options in order to provide them with the ownership rights and they can also provide them with the industry based compensation which will be providing them with maximum satisfaction and they will be working in synchronisation with the goals of the shareholders goals.