PRESENTATIONTOPIC:

AGENCY PROBLEMS

Presented By: Musadiq Ali BBA 3rd semester ICUP

Agency Problem• Definition :

A conflict arising when people (the agents) entrusted to look after the interests of others (the principals) use the authority or power for their own benefit instead. ORThe problem of motivating one party (the agent) to act on behalf of another (the principal) is known as the Principal-agent problem or Agency problem for short.

• Agency problems arise in a variety of different contexts. • For example, • A lawyer is meant to act in the best interest

of his or her client. • Managers act on behalf of shareholders.• Employees work for their employers.• Politicians represent their voters and so on.

Explaination• The problem is that the agent who is

supposed to make the decisions that would best serve the principal is naturally motivated by self-interest, and the agent's own best interests may differ from the principal'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, is supposed to make decisions that will maximize shareholder wealth.

• However, it is in the manager's own best interest to maximize his own wealth.

• While it is not possible to eliminate the agency problem completely.

Solution

• 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.• The threat of takeovers.

The End

Thank you

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