Mark OTU.

Index 5058620
Student number 20754460

What is meant by the 'Agency problem' in the context of a Public Limited Company?
How is it possible for the Agency Problem to be reduced in a company?

Agents(managers) are appointed by individuals or persons who are the sole owners or
stockholders of a company to run the affairs of the company with the primary objective of
maximizing shareholders wealth and profit. A principal-agent problem arises when there is a
conflict of interest between the agent and the principal, which typically occurs when the
agent acts solely in his/her own interests instead of that of owners or shareholders. In a
principal-agent relationship, the principal is the party that legally appoints the agent to
make decisions and take actions on its behalf. For example, a company may hire a financial
advisor to invest its money for the best results. The advisor might invest it in an annuity, to
also earn a higher commission. Agency problems are most prevalent when there’s a
disparity in knowledge between the agent and the principal. It’s too easy and too tempting
for the agent to exploit the knowledge gap for personal gain. 
The Agency problem in a company can be reduced through way which includes

Restrictions on the Agent’s Capabilities

Giving the agent too much power to act on your behalf opens the door for future challenges
and can lead the agent to perhaps make poor choices. Most successful companies practice
checks and balances because it tempers the power of any one individual or entity, keeping
corruption to a minimum.

Full Transparency
Other ways to reduce Agency problems is when there’s a disparity in knowledge between
the agent and the principal. It’s too easy and too tempting for the agent to exploit the
knowledge gap for personal gain. When agent-principal relationships arise in a company,
practicing full transparency can help close the knowledge gap and prevent the agency
problem from emerging. The agent should educate you, the principal, on everything that’s
going on, rather than leaving you in the dark while the agent makes decisions on your
behalf. This will ensure transparency and full disclosure of information
Incentives
The agency problem may also be minimized by provide incentives for agents accordingly to
act in better accordance with the principal's best interests. For example, a manager can be
motivated to act in the shareholders' best interests through incentives such as,
performance-based compensations direct influence by shareholders, the threat of firing or
the threat of takeovers.

In addition to the Above Principal-agent relationships can be regulated, and often are, by
contracts, or laws in the case of fiduciary settings. regulations and contracts put restrictions
on Agents and enable limitation or checks on their functions. The fiduciary law is an example
of an attempt to regulate the arising agency problem in the relationship between managers
and owners.