Question

5. What is the principal & agency problem and why is it so problematic to shareholders? How does this tie into the 12 Floors Story from the Carl Icahn Video discussed in class?

Answer 1

Answer-

A principal-agent problem emerges when there is an irreconcilable circumstance between the agent and the principal, which regularly happens when the agent demonstrations exclusively in his/her own advantages. In a principal-agent relationship, the principal is the gathering that lawfully designates the agent to settle on choices and take activities for its benefit.

The detachment of the "proprietorship" (principal) and the "control" (agent) in principal-agent connections makes the justification for possible irreconcilable situation between the two gatherings.

It is very problematic to the shareholders because shareholders will wish to maximize a company's benefits to expand their profits. Nonetheless, the managers and laborers, who are answerable for everyday running of the firm, may neglect to seek after benefit augmentation. Rather, they focus on appreciating work and continuing ahead with laborers.