What is Agency Conflict?
Agency conflict is a common problem we face in an organization, this problem arises because of the difference in the interest of management, owner, and other related parties. An agency relationship arises whenever one or more individuals hire other individuals to perform some service and also delegate decision-making authority to the agents. Here the hiring parties are the principal and hired individuals are the agent. But the question is what is agency conflict?
Agency Conflict
A potential agency conflict exists whenever a manager owns less than 100 percent of the firm’s common stock. If the firm is a proprietorship business then the manager is the owner, and the owner-manager will take actions to maximize his or her own welfare, or utility. The owner-manager will probably measure utility primarily by personal wealth, but other factors, such as leisure time and perquisites, will be considered. However, if the owner-manager sells some of the firm’s stock to outside investors, a potential conflict of interest, called an agency conflict, arises. For example, the owner-manager may now decide to lead a more relaxed life and not work as strenuously to maximize shareholder wealth because less of this wealth will accrue to him or her. Also, the owner-manager may decide to take more “business trips” to fun locations because some of the costs will now be borne by the outside shareholders.
In most large corporations, potential agency conflicts are quite important, because managers generally own only a small percentage of the firm’s stock. In this situation, shareholder wealth maximization could take a back seat to any number of possible managerial goals. In an organization, an agency conflict may always be there but it is the owners’ responsibility to reduce agency conflict to as much lower level as they can.
Written by
Md. Nahian Mahmud Shaikat
Financial Analyst
Email: [email protected]
Facebook: Nahian Mahmud Shaikat
