Agency costs are expenses incurred due to conflicts of interest between a principal and an agent. In business, these costs arise when managers (agents) pursue personal objectives that diverge from the interests of shareholders (principals).
Such costs can include excessive executive compensation, perks, or decisions that prioritize short-term gains over long-term shareholder value.
Mitigating agency costs is crucial for ensuring efficient and transparent corporate governance, aligning the interests of managers and shareholders, and maximizing overall organizational performance.