The Agency Problem and Corporate Governance

Abstract

A perennial problem with the management of a business has been concerned with the relationship between the managers of a business and its owners and investors, which is of course known as the agency problem. It is generally accepted that the information asymmetry which inevitably exists in this situation cannot readily be overcome and so attention has been devoted to the minimization of any risk associated with the asymmetric information. In the past this has been attempted by attempting to ensure the alignment of objectives through manipulations of the rewards structures, but many would argue that this has merely resulted in increasing information asymmetry and the passing of control – and an element of ownership – to the managerial hierarchy. However viewed, the desired results have not been achieved. More recent attempts therefore have been concerned with procedural changes through the development of strong systems of corporate governance. Such systems of governance have become enshrined in codes with universal application but cannot be considered to be fully effective and are under continual development and modification. In this chapter therefore we consider the relationship between governance procedures and the agency problem.