Agency Problem

The agency problem occurs when there's a conflict of interest between the owners of a company (shareholders) and the people managing it (executives). Managers might make decisions that benefit themselves, rather than maximizing the company's value for shareholders. This issue arises because owners can't always closely supervise managers, leading to potential for decisions that aren't in the best interest of the owners. To address this, companies use incentives, monitoring, and governance structures to align managers' actions with shareholders' goals.