What is the agency theory? How do agency problems occur? How can a board of directors solve agency problems?

An agency theory manages division of force between principals (holders or influence) and administration (experts employed by the organization to mange regular work). Agency theory is, hence, imagined as a set of plans on authoritative control framework focused around the conviction that partition of force from administration may make a crack between the administration and the legislation.

Agency  issues happen when contrasts emerge between the administration (or, org) and the legislation (or principals or governing body). It is on account of the firm should oversee org expense and the expense of exercises to be completed to address organization issues also. For representations, when there is a strike in an organization because of work development, the organization may need to pay and profits of the laborers in one hand, on the other, the organization may need to contract a legitimate firm for discretion; along these lines, the organization may have pay for lawful administrations too. Agency issues happen predominantly because of the accompanying two reasons:

i.          Moral hazard issue it is only excitement toward oneself of operators joined with smile i.e. as managers have little measure of information about the performance of the organization and as they can't screen authoritative execution in  a fitting way, executives are frequently allowed to seek after their individual hobbies. Therefore, as an aftereffect of moral hazard, people may be profited at the expense of the organization's benefits.

ii.         Adverse determination it is an alternate explanation behind agency issue. At the point when specialists are contracted, managers may not speak to the determination trustees, in this manner, they may contract individuals who are not up to the craved levels. Accordingly, their execution is well beneath than the position necessity. Consequently, they can't speak to manager's investment.

These issues might be tended to in the accompanying ways:

i.          Owners can pay good incentives to executives for their administrations. At the same time, the official's dependability to the holders could be decently kept up.

ii.         Owners can pay good incentives to executives for their future execution. This will keep on maintainning dependability to the association.

An execution assessment framework might be attached up to assess general execution of the organization; hence, the executives will be compelled to consider general hierarchical execution as opposed to individual objective.