Agency Issues / Problems

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A conflict of interest between two parties. In companies, agency problems occur when managers act in their own self-interest instead of the interest of the company and its shareholders. Companies can protect against agency problems through good corporate governance practices. (ED) A situation of misaligned incentives which arises when a third-party agent is hired to act on one’s behalf. In a corporate setting, agency problems occur when a manager who is hired to run a company in the interest of shareholders and stakeholders takes actions which benefit himself or herself, with the costs borne by corporation and by extension, shareholders, etc. For example, an executive might manipulate accounting results to increase the size of his or her bonus, or might pursue an expensive acquisition, even though these actions are value destroying. Agency problems can be mitigated through corporate governance features which restrict or discourage these actions or through incentives which align the interest of management and the corporation. Costs resulting from Agency Issues are referred to as Agency Costs.