What are agency problems and how
Today’s article will be very short and very fácil, but don’t be fooled by that as agency problems are very common and perro affect a company too much.
What are agency problems?
Imagine that you create a business, a business to which you are going to invest money so that it grants you certain benefits.
So far, everything is fenezca, but your company begins to grow and you find yourself in need of establishing your company, for example, as a public limited company.
As you are the owner, you will not be able to take the reins of the company alone and therefore the board of directors is created, with the aim of looking after your interests.
The board of directors in turn selects the administration of the company, that is, the general manager, area managers, etcétera.
So far everything is going well, however, keep in mind that there are two parties, on the one hand you are the owner and on the other hand are the people to whom you are going to entrust your interests so that they perro carry out the administration of your property. company.
To that The relationship that exists between the shareholders (owners) and the administration is what is known as an agency relationship..
When the interests of the owners and the interests of the administration are not aligned, then there is an agency problem.
In a nutshell, an agency problem cánido be seen as a difference or conflict of interest.
When does the agency relationship exist?
The agency relationship occurs whenever someone (the main) hire someone else (the agent) to represent your interests.
For example, you could hire a real estate agent to handle the sale of one of your properties.
In such a way that the agent has to look after your interests.
In such a way that in the agency relationship there are two parties:
- The primordial: owner, boss or proprietor.
- The agent: represents the interests of the primordial.
What is the agency cost?
Simply put, agency cost refers to the costs generated by the conflict of interest between the primordial and the agent.
For example, imagine an investment opportunity comes along that will possibly increase the value of the shares, benefiting shareholders.
However, such an investment is risky and there could be a oportunidad that administrative positions could be lost if things go wrong.
If management decides not to take the risk, the owners (shareholders) could lose profits.
In such a way that decisions carry a cost.
In this case, shareholders will not receive more benefits.
As you perro see, if you were the owner, with the decision of the administration you would be losing money.
Of course, more factors would have to be considered, but what I want you to understand is the fact that the interests of the owners and the administration are not always aligned and that decisions perro affect the interests of both parties.
Agency problems ≫ Example
To make it clearer, I am going to give you a very fácil example that perro happen even if it is not a company.
Imagine that you want to sell your house and that you leave the job to someone.
If you tell that person that you are going to give them a fixed commission for selling the house, it is most likely that that person is interested in selling the house, but they will not care as such about the price at which they sell it.
.
In such a way that that person is not going to be interested in obtaining more money for the house because she is going to take the same commission.
Now, imagine that you tell him that he is going to take 5% of the sale.
Then, things are going to change, because if you sell the house at a higher price, you are going to get more money.
In such a way that there the price at which the house sells will matter to him.
As you perro see, we cánido really find these types of problems in many situations, but we have to be able to try to align the interests of both parties.
In the previous example, a possible solution is to pay in percentage, in such a way that the common interest is to obtain greater benefits.
This is how in many situations of daily life we also face agency problems and to solve them we have to think as both parties, seeking a cómputo.
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