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Finance
Agency Problem
The conflict of interest that arises when someone (the agent) is hired to act on behalf of another person (the principal) but has their own incentives that may not align with the principal's best interests.
The agency problem is fundamental to corporate governance. It explains why boards of directors exist (to monitor management on behalf of shareholders), why executive compensation includes long-term equity (to align incentives with the company's future), and why institutional investors actively engage with management on strategy (to protect their interests as principals).
Agency problems exist throughout business: employees who coast when unsupervised, financial advisors who recommend products with higher commissions, lawyers who bill more hours than necessary, politicians who serve donors over constituents. The common thread is always the same: the agent's incentives diverge from the principal's goals, and the principal can't perfectly monitor the agent's behavior.