What are Agency Problems?

The conflict between the managers and shareholders of a company is known as the Agency Problem. Agency problems may have a variety of reasons but the most common reason for such a problem to arise is due to the lack of interest in shareholder's wealth maximization.

Shareholders usually invest in a company to gain the most profits and an organization that fails to provide value is deemed unsuccessful. The reasons for failing in meeting shareholders' requirements despite having profit may be due to the self-interest of managers. In such cases, the shareholders should get priority.

Stakeholders Benefits

Modern companies usually pay more attention to the wellbeing of a company via the stakeholder's benefit lens. If the managers engage too much in self-interest and become biased against the shareholders, the agency problem may arise. Managers therefore should act their best for the benefit of shareholders whose investment runs the company.

An idea of knowing whether a company is working its best is understood from the wellbeing of managers, employees, and societies where they operate. These stakeholders are a part of the overall business and hence they must be treated well by the managers. If managers fail in servicing the stakeholders, they are deemed unsuitable for their designations.

Note − Shareholders look for maximum profitability and dividends from their investments while managers may have other points of view.

Shareholders' Superiority

It is a theory that during any agency problem, the shareholders should be in a supreme position than anyone else. Therefore, the managers of a successful company must pay the shareholders the best according to their capabilities.

Managers may be interested in getting more out of the profits bypassing shareholder's motives in certain circumstances. In such cases, they fulfill more of their own requirements than paying any heed to the shareholders. Agency problems in such cases should be more for the shareholders than the managers.

Note − In case of agency problems, shareholders have the upper hand.

Balancing the Problem

Modern organizations usually look into managers' requirements too as they are the ones who run the business. Therefore, stock options and many other lucrative opportunities are offered to them. The idea is if managers are happy and content, they will act their best to avoid any agency problem.

Similarly, employees of the company are also treated well in order to get maximum productivity on their part. However, if there is an agency problem, talents and good performances may go unnoticed. This may stall the growth of a company. That is why agency problems must be dealt with caution and care so that no one is offended.

Note − Managers of a company are important for its overall health. So, their points should be heard too.