Agency Theory: Principal-Agent Problems

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Agency Theory: Principal-Agent Problems

I need to understand the principal-agent problems that arise in organisations. Thanks...


Principal Agent Problems

Agency Theory refers to the delegation of work from one party to another.
The principal delegates work to an agent.
In the case of a corporation, the term of 'principal' corresponds to owners and 'agent' to directors.
Conflicts of interest can arise such as:
- The agent misusing his power for pecuniary or other advantage;
- The agent not taking appropriate risk in pursuance of the principal´s interests due to the dimension of the risk can be different between both;
- Information asymmetry can be another problem due to different levels of information they have.

Turnaround Manager, Zimbabwe

Agency Theory: The Principle-agent Problem

I agree with Bruno. Adding to the detail, the result of such conflicts will typically be that agents pursue self serving interests, including personal enrichment at the expense of maximizing shareholder wealth.
The diversion of interests between principals and agents is the major problem in Agency Theory.
Eventually there will be a need to align the divergent interests of the principals and agents which in itself will be yet another problem.

  Obert Chinhamo
Director, Zimbabwe

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