Agency Costs

It is the expense caused by different strategies of shareholders and the management team. The problem can be multifarious and it may require more than just monetary incentive to resolve.

The shareholders may want to pursue certain corporate actions to enhance their wealth and the board of directors’ team, the President, and the CEOS may want to adopt an alternative course of action where they may want to implement policies to benefit the managers.

This opposing party dynamic, known as the principal-agent relationship, is most commonly seen in firms where the investors, management, and others involved belong to authoritarian or regulatory sectors like government agencies or churches.

Investors buy and sell stocks to enhance their wealth and if the investor finds there is volatility in the management’s decisions, they may try to sell and invest in more reliable options. Hence, disagreements may affect the stock price and can result in extra costs.  

In certain conditions, the management may not allow passing projects for the growth of the company like in conditions, when they find the project will lead to their job loss.  

On the other hand, shareholders will accept the risk of long-term investment decision-making with the expectation that if the project succeeds, it may promise wealth enhancement. 

There can be other decisions causing disagreements like increasing employee benefits or acquisition plans which can lead to disagreement. 

Such a cost is associated with the agency problem where the cost may fall under the category of operating expense like a manager investing in booking the most expensive hotel while traveling from the company's funds. A firm need to find ways to monitor such costs to lower operating expense.