What is the Agency Problem?

What is the Agency Problem?

• A. A conflict of interest between shareholders and directors
• B. A regulatory requirement for agencies
• C. A supply chain issue
• D. A marketing risk

Answer: (A)

At its heart, the Agency Problem is the tension that arises when owners (shareholders) delegate control to others (directors and managers). Because managers may have different goals or more information about the business, they might pursue personal interests rather than maximizing shareholder value. This creates an incentive misalignment, leading to costs from monitoring and trying to align incentives, such as performance-based pay or board oversight. The correct description is a conflict of interest between shareholders and directors. The other options describe regulatory, supply chain, or marketing issues, which aren’t about governance and control within a company.

At its heart, the Agency Problem is the tension that arises when owners (shareholders) delegate control to others (directors and managers). Because managers may have different goals or more information about the business, they might pursue personal interests rather than maximizing shareholder value. This creates an incentive misalignment, leading to costs from monitoring and trying to align incentives, such as performance-based pay or board oversight. The correct description is a conflict of interest between shareholders and directors. The other options describe regulatory, supply chain, or marketing issues, which aren’t about governance and control within a company.