What is meant by an agency cost or agency problem Do these i

What is meant by an “agency cost” or “agency problem”? Do these interfere with maximizing shareholder wealth? Why or why not? What mechanisms minimize these costs/problems? Are executive compensation contracts effective in mitigating them?

Solution

this is the new management system; which says that the owners are different from managers to the business. means that the business is owned by some one and the business activities, issues and the process will take care by someone other than owner. the former is called as shareholders and the later are called as managers or board of directors of the business.

here the managers are called as the agents to the owners; who carry the interests of the owners. the amount paid to the managers is called as agency cost.

if the agents works towards the owners objectives or priorities, there wont be any problem. if the agents works for their own benefits rather than owners; it is called agency problem. i.e. the agents works for their own priorities rather than owners priorities.

the managers (agents) are there to protect the obligations of the owners. if they did well, they are in the process of wealth maximization of the business.

when both the parties works together to achieve common goals, then these kind of problems will minimise.

executives are the top level people who frame strategies to run the organization in a succesful way. the decisions will impact the total organization as a whole. for this the executives will receive huge amounts as fee or salary or commission.