The Su Post

The Principle-Agent problem means the motivation of one party (usually the agent) to act on behalf of another (the principal). Agency problems arise in a variety of different contexts, and arise when the incentives between the agent and the principal are not perfectly aligned and conflicts of interest arise. As a result the agent may be tempted to act in his or her own interest rather the principal’s. Conflicts of interest are almost inevitable. One of the famous example that pops out of my mind is the Enron scandal revealed in 2001, which eventually led to the bankruptcy of the Enron Corporation and the dissolution of Arthur Anderson. Enron's board of directors, many analysts believe, failed to carry out its regulatory role in the company and rejected its oversight responsibilities, causing the company to venture into illegal activity. Company leadership, including boards of directors and the executive team, does not necessarily have the same interests as shareholders. It is ...