Agency problem can be considered as:
Managers Vs Owners
Creditors Vs Owners
Senior management Vs Junior management
Owners Vs Other parties
Brief discussion of each category of agency problem is specified below:
1. Managers Vs Owners:
In situation of joint stock company ownership is separated from management. For this motive, owners directly cannot take part in managing. The obligation or responsibility of management is on the hand of proficient manager. Sometimes proficient managers give importance to their own interest without consideration to shareholder’s interest. As a consequence, conflict of interest amongst managers and owners is formed.
2. Creditors Vs owners:
Creditors want to have principal and interest payment from owners timely. But owners are not ready to pay the claim of the creditors from their own income if sufficient amount of profit is not produced by the company. As a consequence, conflict arises. Sometimes on behalf of shareholders hurt the interest of bondholders by investing in a very high risky project which is financed by debt capital.
3. Senior management Vs Junior management:
Sometimes conflict between senior management and Junior management arises. Senior management involved with the policy creation. These policies are applied by lower level management. As a consequence, conflict arises between management act as the agent.
4. Owners Vs Other parties:
Owners wants to take full advantage of wealth. On the other hand, suppliers, buyers, employees, and other parties want to have increment of salary, high quality products with less prices, on time payment of bill etc. As a consequence, the interest of owners is hampered.
January 07, 2018