Agency Problem

Agency model explains why there are differences in performance or judgment when displayed by members of a group. In the other words, it tells the connection between delegates work to others that called agents. Two parties usually have different goals, so when they are working together with differences in their own respective goals, they will have unusual manner toward how they would perform. It can also be determined as a branch of financial economics that specifically analyzes the conflicts of interests between people in the same party. By definition of financial economic theory, the most important goal of company or any different kinds of economic organization is to make the most benefits out of stockholders' assets. However, this can't really work out while the stockholders are also the managers. The separation of ownership and management causes the problem of running a business party. This problem can be also called "adverse selection" in which it is really hard to determine if the agents are exactly doing the work for which they are paid. Moreover, directors and managers have power in their authority to make benefits for themselves rather than for shareholders.

There's not really any solution to completely solve this problem. But I think we could eliminate the affection somehow. The most important thing is that shareholders should keep their eyes closer on agencies. Of course, it is impossible for shareholders to completely check on everything work of agencies or managers. So I think what they could do is to create agency cost, which contains all the lost benefits of shareholders due to the performance of managers to make sure the managers will make the most benefit for the whole organization rather than doing something else for their own benefits.