Principal and Agent

Principal ‐shareholders  /  owners
Agent ‐management  /  directors  and  officers

Principals  and  agents  may  have  conflicts  of  interest,  agents  may  take  actions  that  benefit their  personal  goals  at  the  expense  of  the  owners.  Such  situations  can  arise  when :

  1. Agents  make  short  term  decisions  that  may  benefit  themselves  when  long  term  decisions  may  have  provided  greater  shareholder  wealth.    Management  reward  systems  should  bare  this  in  mind.
  2. Agents  may  empire  build  in  order  to  satisfy  their  own needs  and  ego  rather  than  for  the  good  of  the  shareholders
  3. Decisions  may  be  taken  that  protect  managerial  positions  and  perks  rather  than  for  the  benefit  of  shareholders.,  eg.  Costly  acquisitions  etc.

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