what are agency costs 
an agency cost is a type of internal company expense which comes from the actions of an agent acting on behalf of a principal agency costs typically arise in the wake of core inefficiencies dissatisfactions and disruptions such as conflicts of interest between shareholders and management the payment of the agency cost is to the acting agent investopedia xiaojie liuunderstanding agency costagency costs can occur when the interests of the executive management of a corporation conflict with its shareholders shareholders may want management to run the company in a certain manner which increases shareholder value conversely the management may look to grow the company in other ways which may conceivably run counter to the shareholders best interests as a result the shareholders would experience agency costs as early as 1932 american economists gardiner coit means and adolf augustus berle discussed corporate governance in terms of an agent and a principal in applying these principals towards the development of large corporations where the interests of the directors and managers differed from those of owners principal agent relationshipthe opposing party dynamic is called the principal agent relationship which primarily refers to the relationships between shareholders and management personnel in this scenario the shareholders are principals and the management operatives act as agents however the principal agent relationship may also refer to other pairs of connected parties with similar power characteristics for example the relationship between politicians the agents and the voters the principals can result in agency costs if the politicians promise to take certain legislative actions while running for election and once elected don t fulfill those promises the voters experience agency costs in an extension of the principal agent dynamic known as the multiple principal problems describes a scenario where a person acts on behalf of a group of other individuals a closer look at agency costsagency costs include any fees associated with managing the needs of conflicting parties in the process of evaluating and resolving disputes this cost is also known as agency risk agency costs are necessary expenses within any organization where the principals do not yield complete autonomous power due to their failure to operate in a way that benefits the agents working underneath them it can ultimately negatively impact their profitability these costs also refer to economic incentives such as performance bonuses stock options and other carrots which would stimulate agents to execute their duties properly the agent s purpose is to help a company thrive thereby aligning the interests of all stakeholders dissatisfied shareholdersshareholders who disagree with the direction management takes may be less inclined to hold on to the company s stock over the long term also if a specific action triggers enough shareholders to sell their shares a mass sell off could happen resulting in a decline in the stock price as a result companies have a financial interest in benefitting shareholders and improving the company s financial position as failing to do so could result in stock prices dropping additionally a significant purge of shares could potentially spook potential new investors from taking positions thus causing a chain reaction which could depress stock prices even further in cases where the shareholders become particularly distressed with the actions of a company s top brass an attempt to elect different members to the board of directors may occur the ouster of the existing management can happen if shareholders vote to appoint new members to the board not only can this jarring action result in significant financial costs but it can also result in the expenditure of time and mental resources such upheavals also cause unpleasant and exorbitant red tape problems inherent in top chain recalibration of power real world example of agency costssome of the most notorious examples of agency risks come during financial scandals such as the enron debacle in 2001 as reported in this article on smallbusiness chron com the company s board of directors and senior officers sold off their stock shares at higher prices due to fraudulent accounting information which artificially inflated the stock s value as a result shareholders lost significant money when enron share price consequently nosedived broken down to its simplest terms according to the journal of accountancy the enron debacle happened because of individual and collective greed born in an atmosphere of market euphoria and corporate arrogance 