Category: 

What Is an Agency Problem?

When the interests of the board of directors, stockholders, and executives of publicly held companies are not aligned, it is referred to as an agency problem.
Article Details
  • Written By: Alexis W.
  • Edited By: Heather Bailey
  • Last Modified Date: 22 September 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
The fewest car accident fatalities occur on Tuesdays.  more...

October 23 ,  1983 :  Suicide bombers killed nearly 300 US and French military troops in Beirut.  more...

An agency problem occurs when the interests of stockholders, the board of directors, and/or the management of the company are not perfectly aligned or when these entities conflict. In publicly held companies, there are a variety of individuals with an interest in the performance of the company. The managers and executives who run the company on a day-to-day basis, the shareholders who own stock, and the board of directors who oversee the company's business development all may have different aims or ideas of how the business can be run.

Executives of a corporation may, for example, be interested in achieving good long-term growth of the company. Since their performance is measured by how the company does in both the short term and the long run, the decisions they make are based on the goals of generating profit both now and in the future. This may mean they wish to engage in capital expenditures now to secure a possible benefit or gain in the future.

Ad

Many stockholders, on the other hand, may be focused on the immediate earnings and returns of a company, as these are important metrics in the valuation of the price of a share of stock on the open market. A stockholder who doesn't intend to hold the company long term may prefer a dividend be paid instead of that the money be reinvested to achieve a long-term gain for the company. This is just one example in which the interests of the shareholders may not be perfectly aligned with those of the corporate governance. A more dramatic example of an agency problem may occur when the corporate executives are out to maximize their own compensation, sometimes at the expense of the company or shareholders.

The board of directors may also have a difference of opinion from the shareholders or the executives, aiming to take the company in a different direction still. The board may have the power to remove a chief executive or manager from power, but the shareholders may disapprove of this decision. Conflicts can occur among all three entities, creating issues that are difficult to resolve.

When an agency problem exists, it can be difficult for a company to resolve. Shareholders generally get a vote and can vote with the board of directors against the executives, for example. When the problem is resolved in this manner, the executives could end up forced to follow a course of action they do not entirely agree with, as the majority rules.

Ad

More from Wisegeek

You might also Like

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email