What does the "agency problem" mean?

Question

Quizplus · Accepted Answer

The Answer is An agency relationship is defined as a situation where a third party (the principal) contracts with another party (the agent) to act on behalf of the principal for a remuneration.
This situation describes a general framework within which the relationship between owners and managers of a firm appears as a specific case.
Because the agent has access to sensitive and complete information, because the agent has powerful leverage to influence the firm's strategy, and because sometimes the interests of the owners may differ from the interest of the managers, a problem may arise: how can the owners make sure that the managers are always acting in their best interest and that they are not entering into over-risky behaviors or undertaking strategic actions in a self-serving way?
Several responses exist within the firm, essentially around different mechanisms:
1-Managers' compensation aligning the two parties' interests
2-The controlling role of the Board of directors
3-The concentration of capital contributing to the emergence of strong and attentive stockholders
4-The external mechanism of corporate market where an underperforming firm faces the risk of being acquired by a raider or another firm
5-Shared values within the firm

What Does the "Agency Problem" Mean