Describe the system of legal responsibilities among shareholders, the board of directors, and top managers in large, public U.S. corporations. Then explain how, in practice, agency problems arise that...

Agency Problem
Agency Problem

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The agency problem with respect to Corporate Finance, typically mentions the conflict of
interest amid a company's administration and the company's shareholders. The executive,
acting as the agent for the stockholders, or principals, is required to make decisions that will
make sure that the shareholder’s wealth is maximized. However, it is in the manager's own
best interest to maximize his net worth by sometimes forgetting about the company’s
interests. The Agency problem pertains to the financial and corporate governance fraud
which is caused because of the framework of the stakeholders and the authorities which are
instilled in the corporate system to take care of the interest of all the stakeholders and
increase the shareholder’s wealth. (Armour et al, 2009)
The Corporate Governance implies that the company would manage its affairs with diligence,
transparency, responsibility and accountability and maximize shareholder wealth and that is
the reason that it is required that corporations should design systems, processes, procedures ,
structures, decisions to augment financial performance. There are four theories of Corporate
Governance. (Murtishaw, 2006)
1. Agency Theory: This theory states that the shareholders are owners and the managers are
the agents to control the functioning of the company. The Discretionary powers...