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What Are Principal-Agent Problems?

Stock investors are principals who rely on a company's CEO as their agent to increase stock prices or pay dividends. However, the CEO may instead choose to plow profits back into expansion or pay big bonuses, failing to act in the principals' best interests. This is known as a principal-agent problem. There are ways to address it, such as clarifying expectations for agents and monitoring their performance. Ultimately, it is up to the principals to correct issues arising from misaligned incentives between themselves and their agents.

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Papan Das Sabuj
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30 views1 page

What Are Principal-Agent Problems?

Stock investors are principals who rely on a company's CEO as their agent to increase stock prices or pay dividends. However, the CEO may instead choose to plow profits back into expansion or pay big bonuses, failing to act in the principals' best interests. This is known as a principal-agent problem. There are ways to address it, such as clarifying expectations for agents and monitoring their performance. Ultimately, it is up to the principals to correct issues arising from misaligned incentives between themselves and their agents.

Uploaded by

Papan Das Sabuj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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What are Principal-Agent Problems?

For example, a company's stock investors, as part-owners, are principals who


rely on the company's chief executive officer (CEO), as their agent, to carry out a
strategy in their best interests. That is, they want the stock to increase in price or
pay a dividend, or both. If the CEO opts instead to plow all the profits into
expansion or pay big bonuses to managers, the principals may feel they have
been let down by their agent.

There are a number of remedies for the principal-agent problem, and many of
them involve clarifying expectations and monitoring results. The principal is
generally the only party who can or will correct the problem.

Challenges (1)

♦ To achieve excellence in Corporate Governance

♦ To permanently meet the mix of

— strict legal regulations

— regulatory requirements

— softer best practice guidelines

♦ Global applicability versus compliance with local jurisdiction

♦ Conflicting rules in a transborder environment

18

Challenges (2)

♦ Timely implementation of best Corporate Governance throughout the

Group

♦ Consisteny in internal rules and regulations

♦ Internal controls and documentation

♦ Education and Training

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