Question

Discuss and relate the following concepts: agency, agency problem, agency costs, and corporate
governance. (maximum 350 words)

Answer 1

A business is run with the intention of maximizing the wealth of the shareholders. There are a number of areas in which the business will have to carry out its business activities so that it can maximise the wealth of the shareholders. In order to do this, the company will have to take the help of other people that is agency. Since all the activities of the business may not be possible for the owners of the business to do, they hire agents. The agents carry out the work of the business owner on his behalf. The owner of the business is known as the Principal and the person who carries out the business activities is known as agency. The relationship between these two parties is known as principal-agency relationship. However, there may be some issues that may arise due to the principal - agency relationship. It is found that sometimes the agenc does not perform all activities in accordance with the principal's order. This may happen due to the clash or the mismatch between the principal's and the agent's goals. The agent may have some personal goals that may lead to conflicts with the goals of the principal or the company's owners. This is known as agency problems. There are also some costs that the company (Principal) will have to bear for employing the agency. They are known as the agency costs. The conflict between the agency and the Principal will lead to issues of corporate governance. The company will have to frame their corporate governance policies in such a way that any unethical behavior can be quickly identified and punished.