Question

What is an “agency conflict”? & Describe the possible agency conflict between managers and stockholders. Provide an example.

Answer 1

The agency conflict is the problem that arises when the agency is unable to balance between his self interests and the interests that have been allocated to him as the agent. For example: the finance manager of a company has the goal of maximizing the shareholders' wealth. This is the interest that has been allocated to him as the agent of the shareholders of the company. But his self interest may include the fact that he wants to maximize his own personal wealth. Then there arises a clash or conflict in interests. Such kind of conflict is known as agency conflict. As a result of such a conflict, the finance manager may indulge in unethical activities like insider trading. This is harmful for the company as well as for its shareholders. The company will face the consequences of an agency conflict.