29 June 2015
An agent is supposed to act on behalf of and in the best interest of the principal. Agency problem refers to a situation where the personal interest of the agent clashes with the interest of the person(s) on whose behalf he is supposed to act. For example, a CEO has to decide on the demerger of a company and knows that this will unlock the value of the assets of the company and benefit the shareholders. At the same time demerging the company means that the company will be split up and he will lose control of some of the divisions of the company. If he is being paid commission as a % of the net profit of the entire company then he knows that the profit of the demerged company of which he is the CEO will be much lower and his commission will decrease. Thus, his own interest goes against the best interest of the shareholders. This is an agency problem.
Role of finance manager is fairly simple can be found in the ICAI module.
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