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Agency Problem

The document discusses the agency problem that exists in modern large corporations where there is a separation of ownership and management. [1] Managers may pursue their own interests which diverge from maximizing shareholder value, such as choosing less risky projects. [2] This occurs because managers only own a small percentage of the company and want to protect their positions. [3] The differing interests between principals (shareholders) and agents (managers) is called the agency problem.

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Mrinal Kanti Das
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1K views1 page

Agency Problem

The document discusses the agency problem that exists in modern large corporations where there is a separation of ownership and management. [1] Managers may pursue their own interests which diverge from maximizing shareholder value, such as choosing less risky projects. [2] This occurs because managers only own a small percentage of the company and want to protect their positions. [3] The differing interests between principals (shareholders) and agents (managers) is called the agency problem.

Uploaded by

Mrinal Kanti Das
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Agency Problem:

The modern large corporation is distinguished by the separation of ownership from the management. Typically, managers own only a small percentage of the common stock outstanding. Because of this separation of ownership and management managers interest may diverge from stockholders interest. Manager may seek to achieve a level of performance that helps to protect their own position such as choosing a less risky project instead of more risky project when the latter is more profitable. They might prefer to earn a lesser, but still satisfactory return instead of risking and adverse outcome for which they could be criticized. In this situation, manager can be said to be satisfiers rather than maximizes. This situation is referred to the agency problem, which occurs when stockholder employ other individual to act on their behalf. According to Charles P. jones

Agency problem is the potential conflict between principals (shareholder) and agents (manager). Investopedia explains 'Agency Problem'
A conflict of interest arising between creditors, shareholders and management because of differing goals is called agency problem. For example, an agency problem exists when management and stockholders have conflicting ideas on how the company should be run. According to L.J. Gitman

Agency problem is the likelihood that manager may place personal goals ahead of corporate goals
We may think of management as the agents of the owners. Shareholder, hoping that the agents will act in the shareholders best interest, delegate decision making authority to them. But in practical shareholders hope do not hold good. Agents always think of their own interest. And this situation creates separation of agents goal from corporate goal. This is called agency problem.

At last it can be said that It has long been recognized that the separation of ownership and control in the modern corporation results in potential conflicts between the owners and the managers. The objective of management may differ from those of the firms shareholders. This separation of ownership from management creates a situation in which management may act in its own best interests rather than those of the shareholder. This situation is called agency problem.

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