Question

Agency relationship refers to a consensual relationship between two parties, where one person (the principal) or entity authorizes the other, the agent, to act on his, her, or its behalf. Agency relationships exist in most large corporations due to the separation of management from ownership. The lack of alignment of the principal and the agent interests create an agency cost. What are the main implications of this separation

Answer 1

The main implications of the agency separation are goal incongruence, self-interest, and low productivity.

Step-by-step explanation:

Goal incongruence between an agent and the principal arises from the lack of alignment in their interests. While the agent is appointed to represent the principal, most often, the agent acts in her own interest instead of in the best interest of the principal. This lack of alignment reduces the productivity that could result from the agency relationship. Another implication of the management separation is that the agent's risk appetite will be different from that of the principal. The principal will need to exercise some control over the agent to curb excessive risk-taking by the agent.