Question

A typical factor that creates principal-agent problems is

the level of CEO and executive compensation

the fluctuations of the stock market

lack of transparency in some manager/agent actions

the small number of agents relative to the number of principals

the concept of loyalty

Answer 1

The answer is lack of transparency in some manager/agent actions

• The agency view of the corporation posits that the decision rights (control) of the corporation are entrusted to the manager to act in shareholders ‘ interests. Control systems in corporate governance can help align managers’ incentives with those of shareholders and other stakeholders.
• The principal – agent problem concerns the difficulties in motivating one party (the “agent”), to act on behalf of another (the “principal”). The two parties have different interests and asymmetric information. Moral hazard and conflict of interest may thus arise.
• The deviation from the principal’s interest by the agent is called “agency costs. ” Agency costs mainly arise due to contracting costs and the divergence of control, separation of ownership and control, and the different objectives (rather than shareholder maximization) of the managers.
• Much recent interest in corporate governance is concerned with mitigation of the conflicts of interests between stakeholders. These occur when an individual or organization is involved in multiple interests that may lead to conflicts in their ability to act in the best interest of one party.