Discuss the agency problem in organizations and discuss thre

Solution

ANSWER:

Agency problem refers to a conflict of interest between the needs of the principal and the needs of the agent. In corporate finance, there are two main agency relationships: company\'s management and the company\'s stockholders; thus in finance the agency problem mainly refers to a conflict of interest between managers and stockholders. Such conflicts can greatly hamper efficiency of an organization and decrease the agency\'s productivity, thus it is important to solve. It can be solved by:

--Managerial Compensation: Managerial compensation is an approach where the incentive mechanism is applied for the good performance of the managers. The organisation motive is to attract and retain able managers and to harmonize managerial actions with the shareholders interest. Numerous measures are applied for the evaluation of the managers\' performance. Few of the most common are profit, sales, current value of expected cash flows and value added.

-- Corporate governance: Corporate governance refers to regards the roles and the relations of each and every party involved as interested in the organisation. An efficient system of corporate governance is of significant importance for a good control of the organisation, for the enhancement of their performances and for a better approach and availability of the external financing.

-- Shareholder control and interference: Shareholders can influence the organisation\'s management in two approaches. Firstly, they can influence management directly as to how the company needs to be managed. Secondly, any stakeholder can make a proposal which can be voted on at the annual general meeting (AGM).