Answer to Question #182474 in Management for Okyere

Question

What is meant by the 'Agency problem' in the context of a Public Limited Company?

How is it possible for the Agency Problem to be reduced in a company?

Answer 1

a) The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. In corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders.

b) Agency problem in a business can be overcome by requiring full transparency, placing restrictions on the agent's capabilities, and tying your compensation structure to the well-being of the principal.