Agency problem

The Agency Problem is one that is currently being faced by numerous major corporations all across the globe. This problem is also known as the Principal-Agent Problem in some cases. Many organizations are currently facing this particular problem due to the simple fact that many organizations have a very similar structure which normally would include the Principal and the Agent. The Principal normally being the board of Directors, Managers,and or share holders. The Agents would be the actual individual or organization vested with the responsibility to accommodate the anticipated intentions and interest of the Principal in what ever the task may be. So essentially to further illustrate this idea, let us assume a Pizza shop since we all love pizza. The Principal in this case would be the owner of the pizza shop/restaurant while the agent or agents would be the pizza delivery boys who are counted on to get there in no more than 30 minutes or a similar standard otherwise the pizza is free!! From this example, we can see that the agents are placed in the position to use resources which incur agency costs such as the delivery vehicle, gas and other costs of operating the vehicle such as insurance which do not come out of the delivery boy's pay check. The delivery boys do so in order to complete a task that will be beneficial to the principal. The "Problem" now arises when the agent has no say-so over how these resources are used to accomplish the task by the agent. But the good thing about the Agency Problem is that it is an identified problem which means it can be corrected and solved. There are a number of ways to tackling this problem but to be logical, it makes best sense to have an incentive factor or reward placed into the requirements to solving the problem. The idea is that when incentives exist (Bonuses or possible promotion after a number met requirements)the agent is more than likely inclined to actually perform the task which he or she is obligated to perform by contract as though it was in their own interest. Now that there is an added incentive, it is in the agents interest to perform in outstanding standards in order to achieve that added incentive.

Emmanuel Ameh