The separation of ownership and control is often a subject of concern for financial managers. Management decisions are sometimes not acceptable to shareholders. This, in turn, raises conflicts. These conflicts are called agency problems.
For example, a chief executive officer (CEO) may spend a considerable amount of the organization’s capital on artwork to decorate the office premises. The shareholders may raise the concern that their investment has been inappropriately invested as decorating the office premises will not yield any financial benefits.
Provide at least two more examples of agency problems. Why does such a conflict develop? Are such conflicts more likely to occur in smaller or larger organizations? Why? What can be done to decrease the likelihood of these conflicts?