Why does agency problem exist

The Agency Problem in Practice For example, you may hire a financial advisor to invest your money for the best results. The advisor might invest it in an annuity, to also earn a higher commission. On your end, you could offer a higher compensation right away, based on your relationship with the advisor. As a company officer or representative, you may be tempted to increase your share prices to raise the company value. It is unethical, but many companies do it through miscalculations in reports.

It is a conflict of interest taking place that takes place when people who are interested in responsibilities misuse their authority and power for personal benefits. It can be resolved only if the organizations are willing to resolve it. You are free to use this image on your website, templates etc, Please provide us with an attribution link How to Provide Attribution?

Every organization has its own set of long-term and short-term goals and objectives that it wishes to achieve in a pre-determined period of time.

In this context, it must also be noted that the goals of the management may not necessarily align with that of the stockholders. The share price increase is a direct function of how competitive the company is, its positioning, growth strategy, and how it generates profits. This contrast between the goals and objectives of the management and stockholders of an organization may often become a basis for agency problems.

Precisely speaking there are three types which are discussed below-. This sudden unnecessary rise in the price of the toothpaste disappointed the customers and they boycotted the product sold by the company.

Some Ponzi schemes simply take advantage of consumer suspicions and fears about the banking industry even though established financial institutions reduce risk by providing oversight and enforcing legal practices. These investments create an environment where the consumer cannot properly ensure that the agent is acting in the principal's best interest.

Many examples of the agency problem occur away from the watchful eye of regulators and are often perpetrated against investors in situations wherein oversight is limited or completely nonexistent. Bernie Madoff's scam is probably one of the most notable examples of a Ponzi scheme.

But It isn't easy to determine when Madoff began to defraud his investors. The returns he promised his investors were higher than what most investment firms and banks were offering at the time. They were so promising that almost all of his investors looked the other way.

Madoff put their money into a bank account and funded redemption requests with newly invested money. His scheme unraveled when he could no longer pay his investors and confessed. Ultimately, Madoff was criminally charged and convicted for his actions. He was sentenced to serve a year prison sentence and died behind bars at the age of 82 in April Anne M. Wilkins, William W. Acuff, and Dana R. Accessed April 23, Business Essentials.

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