What agency problems exist within companies and how do companies manage

these in order to reduce agency costs?

This paper seeks to outline what constitutes the agency problem, that irks majority of
modern day business from the time running or management of businesses was handled
by non-equity holders. It will further discuss the cost implications and how companies
mitigate these inherent cost in the agency-principal dichotomy.

Agency problem is understood to arise due to the asymmetry of information between

shareholders and managers of businesses resulting in conflicting interest.

This conflict arises when separate parties in a business relationship, such as a

corporation's managers and shareholders, or principals and agents, have disparate
interests (Ross, 2019).

It is noteworthy that the shareholders are the owners of the company/business by

providing capital, whiles managers run and control the company on a day to day basis.
This creates a principal agent relationship, with the shareholders being the agent and
the shareholders the principal.

Below are some factors that contribute to the Agency problem:

Ø Separation of ownership from management or control of the business

Ø Asymmetry of information, there is no common seepage of information between

management and shareholders, and finally,

Ø Goals of managers may not align with goals of shareholders – interested only in
profit maximization and sustained growth of the business. (Abdulai, 2019).

The costs of the agency problem are as a result of the above factors, that lead to
pecuniary and other loss to the business.

The Corporate Finance Institute explains the agency costs as internal costs incurred
due to the competing interests of shareholders (principals) and the management team
(agents). Expenses that are associated with resolving this disagreement and managing
the relationship are referred to as agency costs (CFI, 2020).

To cure this malaise for businesses, there are two prong approach that are not mutually
exclusive – namely: Financial and Non-Financial.

The Financial incentives that can reduce the agency problem involves offering
management the stock option, to own shares, annual bonuses may also incentivize
managers to uphold shareholders’ interests.

v New office or workspace

v Training opportunities

v Recognition from co-workers

v Corporate car

In conclusion, it is noteworthy that the incident of agency cost cannot be completely

removed once a principal agency relationship persists between owners and managers
of businesses. This problem at best can be mitigated.

REFERENCES:

1. Ross S. 2019, How Do Modern Corporations Deal with Agency

Problem? Investopedia.

Available at: https://www.investopedia.com/ask/answers/041015/how-do-modern-

corporations-deal-agency-problems.asp

Accessed: 20th September 20, 2020

2. Abdulai A. 2019, ALL-IN ONE FINANCIAL MANAGEMENT STRATEGY:

SIMPLIFIED. Ghana School of Law

3. CFI, 2019, Agency Cost- The Costs Shareholders Bear for having Managers Run
the Business.

Available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/agency-

costs/

Accessed: 20th September 20, 2020