Finance

Agency problem is a conflict which occurs when an agent, whose obligation is to manage the interests of the principal, misuses the authority given to him and directs the benefits to himself. Also referred to as principal-agency problem, this dilemma exists in many organizations like in a business, club, church, or in government. In finance, agency problem may occur when directors of a public company differ with shareholders on the prudent ways of investing the firms assets (Walker, 1997). Parties that are usually affected by this problem include the stockholders, bondholders and the managers.
         
The management of a company must run the business in such a way that all the stakeholders benefit. Since this conflict cannot be completely resolved without harming the company, organizations usually institute certain measures to control it. These include rewards for good performance, sharing of profits, efficiency wages, creation of various screening procedures and supervisory departments. Agency theories analyzes why the conflict of interest arises between individuals with dissimilar interest in the same business.
         
Another concept of agency problem is the agency cost. This is a cost which arises after the principal allows the agent to make decisions for him. It is further influenced by the fact that owners of the company are not necessarily the ones who manage its activities. Since it is extremely hard to collect all shareholders with small stakes to run the business, day to day control is left to the managers (Droege, Spiller, 2009). Therefore, when ownership is separated from control, shareholders may fear that managers may pursue interest thats not beneficial to them.
               
Owners of a business cannot figure out the extent to which a contract has been finalized. The only way this problem can be resolved is by instituting measures and appropriate incentives that will make agents fulfill the wishes of the principals. According to game theory, conflict can be resolved by aligning the individual interest of an agent to correspond to the principals desire. In job contacting, personal contracts play major roles in determining performance. Incentives that help mitigate the agency problem are different for various fields. Salesmen can receive part or the whole portion of their wages as commission, factory employees can de paid hourly while office workers can receive higher overtime.
               
Manual jobs or unskilled labor such as waiters and parking boys are prone to agency problems. This is because the employees whose wages are low depend largely on tips to cater for their expenses. Such tips come by when employees give favors to customers which lessen the profit of the establishment. Moreover, research has shown that agents who earn according to their performance rarely give support to their fellow colleagues (Graves, 1999). This is setback to the company.
               
According to David and Erik 2009, the agency problem can be related energy consumption. They say that when a new and cost effective energy saving technology is not implemented, market failure occurs. A common situation is between a landlord and a tenant. If the cost of energy is met by the landlord, the tenant will lack the motivation to limit his energy consumption. Therefore, the principal agent problem results from failure to utilize the energy saving technology (David, Erik, 2009)
               
In conclusion, researchers have advised on better incentive techniques and efficient budgeting methods as a way of curbing the agency problem. Managers who doctor the balance sheet to give the impression that the company looks poorer or reduce the share price should be closely monitored by the government in order to save public from exploitation.