What is the principal-agent problem? and What is corporate governance? Do they complement one another or...

What is the principal-agent problem? and What is corporate governance? Do they complement one another or do they conflict with one another?

Expert Solution

Principal agent problem is the problem when the agents which are appointed by principal, works in their own interest rather than working in interest of the principal.

Agents are appointed by the principal in regards with some specified works and they are liable to work in the interest of the principal.

Like Management are the agents for the shareholders and they are liable to work in the interest of shareholders so when they work in their own interest rather than working for Shareholders interest. It's an example for principal agent problem.

Example- When Lehman management worked in their own interest rather than working in interest of shareholders. The company went bust.

Corporate governance is adoption of best corporate principles which emphasizes on adequate disclosure so that interest of different stakeholders are protected and goals are achieved in efficient and effective manner.

Corporate governance and principal agent problem are contradictory to each other. When there is adequate level of high corporate governance there will be lesser principal agent problems. When there is inadequate level of low corporate governance there will be greater principal agent problems.

jeff jeffy answered 1 year ago

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