Question

What are agency problems? What are some approaches to solving them?

Answer 1

AGENCY PROBLEMS

The agency problems is a conflict of interest inherent in any relationship where one party is expected to act in another'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 even though it is in the manager’s best interest to maximize his own wealth.Agency problems are common in fiduciary relationships, such as between trustees and beneficiaries; board members and shareholders; and lawyers and clients. These relationships can be stringent in a legal sense, as is the case in the relationship between lawyers and their clients due to the U.S. Supreme Court's assertion that an attorney must act in complete fairness, loyalty and fidelity to their clients.

APPROACHES TO SOLVE AGENCY PROBLEMS ARE AS FOLLOWS:-

1. DISCUSSION - One way in which problems can be resolved is by creating an open forum for discussion.If problems are not brought out into the open,then they tend to fester. By creating a forum in which employees can bring management's attention to problems,without fear of reprisal, the agency takes a first step to resolving the issues that need addressing.An agency should consider a town hall forum or other public space.

2. MEDIATION - When a problem has been made public,then an agency can attempt to solve the problem by mediating the conflict between the involved.In some cases,a senior member of the company may act as mediator. However, in other cases, to maintain impartiality, the company may hire an outside mediator to come in and help the warring parties solve their differences.The mediation is designed to satisfy both parties as much as possible.

3. ARBITRATION - In some cases,if a problem cannot be successfully mediated,then the two parties may choose to arbitrate the dispute.In this case, both parties agree to let another person hear their sides of the disagreement and abide by the decision rendered.This is less preferable to mediation in that it will more often leave one party feeling cheated. However,if a dispute can be resolved amicably, judgment must be rendered.

4. SEGREGATION - In some cases,if a problem cannot be successfully mediated,then the two parties may choose to arbitrate the dispute. In this case, both parties agree to let another person hear their sides of the disagreement and abide by the decision rendered.This is less preferable to mediation in that it will more often leave one party feeling cheated.However,if a dispute can be resolved amicably, judgment must be rendered.