The agency problem refers to a situation when there's a conflict of interest between the management if s company and the stakeholders of the company. It occurs when agents rather than looking out for the best interest of theur principals look out for their own personal interest.
The agency problem can be mitigated through transparency and also by placing restrictions on what the agency is capable of doing. Compensation should also be linked based on how the agency performs.
The contract should be designed in such a way that it enhances the incentive of the agent to act in the principal's best interest. There should also be a way that agency's are monitored.
