Principal–agent problem

A conflict arising when an agent makes decisions for a principal but has different interests or information the principal cannot fully observe.

Information asymmetry: A situation in which parties to an interaction possess different information. The principal cannot fully judge the agent’s knowledge, actions, or effort.
Corporate governance: The systems by which corporations are directed, monitored, and held accountable. Shareholders delegate control to managers whose decisions may not maximize shareholder interests.
Stewardship theory: A theory that managers can be motivated to act as responsible stewards of an organization’s interests. It challenges the assumption that managers’ interests necessarily diverge from owners’ interests.
Agency theory: A framework for analyzing relationships in which one party delegates work or decisions to another. The principal–agent problem is agency theory’s central conflict of interest.
Shareholder value: The economic value attributable to a corporation’s equity owners. Managerial choices can increase or reduce the value owners sought to protect through delegation.
Moral hazard: A party takes hidden actions that shift risk or costs onto another party. An agent may take actions that benefit them while imposing costs on the principal.
Executive compensation: The salaries, bonuses, equity, and other rewards paid to senior corporate officers. Pay structures attempt to connect managers’ rewards with organizational performance.
Transaction cost economics: An economic approach explaining organizational arrangements through the costs of negotiating and enforcing exchange. It considers contracting and monitoring costs alongside conflicts between principals and agents.
Delegation: The assignment of authority or responsibility from one party to another. The problem begins when a principal entrusts decisions to an agent.
Corporate fraud: Deliberate deception by a corporation or its representatives for financial or other gain. Weak oversight can let agents conceal actions that harm principals and other stakeholders.

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