Shan Haider Faruque

FE 101
14 September 2014
The Agency Problem



The agency problem is an issue which refers to the conflict between agents and
principals in a company. This occurs when a principal such as a director, CEO or shareholder
delegates authority to a manager or agent who has to use it to complete a task or to maximize
the companys profits and advance the company forward. The agent will want to best serve his
own interests and so can act in a way which goes against the wishes of the principal(s) and the
overall well being of the company. In the case of publicly traded companies, the issue crops us
between the board of directors and the shareholders. There is no way to completely remove this
problem as convincing everyone in a company to forgo their own self interest in favor of
increasing someone elses wealth is a difficult task. Although the misuse of authority can be
regulated through incentives for performance and threats of firing (for acting independently), the
costs of implementing such policies are always high and so they cannot be put in place.
In a publicly traded company, the decision on where to invest the companies assets has
to be decided between the board of directors and the shareholders. The agency problem shows
up again as both parties will not have the same viewpoints or interests. An area which seems
appealing to the board of directors may not resonate well with the shareholders and conflicts of
interest will arise. Although the shareholders have the major power, the board of directors also
have a role and a compromise may have to be reached which is satisfactory to both parties.




Works Cited
Definition of Agency Problem. investopedia.com. Investopedia US, n.d. Web. 14
September 2014.
Financial definition of Agency problem. thefreedictionary.com. Farlex, Inc, n.d. Web. 14
September 2014.