what is the big deal about the principal agent problem 1


What is the big deal about the Principal-Agent problem?

Investopedia defines the Agency Problem as

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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. The manager, acting as the agent for the shareholders, or principals (Links to an external site.)Links to an external site., is supposed to make decisions that will maximize shareholder (Links to an external site.)Links to an external site. wealth even though it is in the manager’s best interest to maximize his own wealth.

While it is not possible to eliminate the agency problem completely, the manager can be motivated to act in the shareholders’ best interests through incentives such as performance-based compensation, direct influence by shareholders, the threat of firing and the threat of takeovers.

For this discussion watch the video Party’s Over: Tyco’s Kozlowski (Links to an external site.)Links to an external site., identify different incidences where agency conflicts arose between Dennis Koslowski and the shareholders of Tyco International. Discuss why you believe they are agency conflicts and what are some ways they might be able to monitor or control for these agency conflicts.

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