Final answer:
The principal-agent problem arises not only between owners and managers but also between managers and employees, due to conflicting interests and asymmetric information levels. The growing transparency of firms makes personal knowledge of managers by investors less significant, thereby affecting investment decisions. The shift towards stakeholder theory emphasizes the balance of interests for all stakeholders.
Step-by-step explanation:
The principal-agent problem exists not only between owners and managers but also between managers and employees. This issue arises when there is a conflict of interest between a principal (owner or manager) and an agent (managers or employees), each of whom has different objectives and levels of information. As a firm grows and information about its operations becomes more transparent through reports on products, revenues, costs, and profits, the personal knowledge of managers by investors like bondholders and shareholders becomes less critical, resulting in increased willingness to provide financial capital without a personal relationship.
In contemporary organizations, the dynamics between managers and employees are increasingly recognized as a partnership, where both contribute to the organization's goals. Stakeholder theory, as opposed to shareholder primacy, advances the notion that managers should balance the interests of all stakeholders rather than focusing solely on shareholder wealth maximization. Nonetheless, information asymmetry between managers and employees can impede such balanced considerations and lead to the principal-agent problem.