The Agency Problem

The agency problem occurs when there's a conflict of interest between principals (owners or shareholders) and agents (managers or executives). While principals want the company to maximize value, agents may pursue personal goals or perks that don’t align with those interests. This divergence can lead to less optimal decisions, increased costs, or actions that benefit managers at the expense of owners. Effective monitoring, incentives, and governance are needed to align the agents’ behavior with the principals’ objectives and reduce this conflict.