In today’s complex corporate environment, the concept of the agency problem has moved from academic textbooks into boardrooms, investor meetings and governance reviews. At its core, the agency problem is the conflict of interest that arises when the company’s owners (the shareholders or “principals”) delegate decision-making to managers or executives (the “agents”). The expectation is that managers will act in the owners’ interests — namely, maximising shareholder wealth — but in practice managers may pursue their own goals, which can diverge from owner interests.

What is the Agency Problem?

• The principal is typically the shareholder or the collective of shareholders who provide capital.
  
  

• The agent is the manager or executive who runs the business day-to-day.
  
  

• The core issue: the agent may have different risk-preferences, information, motivations and incentives compared to the principal. For example:
  
  

• A manager may favour strategies that increase their job security (e.g., avoiding risky but profitable projects) rather than taking on high‐return but riskier investments.
  
  

• A manager may drive projects that increase their personal visibility, reputation or compensation, but which do not maximize shareholder value.
  
  

• Information asymmetry – managers often have more, better information than shareholders, and without proper monitoring the agent can exploit this gap.
  
  

Why this matters now more than ever

With increased regulatory scrutiny, investor activism, ESG (Environmental, Social & Governance) imperatives, and global capital flows, the agency problem is no longer an obscure theoretical issue — it’s a material governance risk. Poor alignment between shareholders and management can lead to:

• Decisions that undermine long‐term value.
  
  

• Reduced investor confidence.
  
  

• Governance failures and reputational damage.
  
  

Recent Real-World Examples

Here are some recent large‐public company instances where the agency problem and related governance conflicts have come into sharp focus:

• Volkswagen AG (Germany): At Volkswagen’s 2025 annual general meeting, shareholders raised major concerns about the fact that its CEO held dual leadership roles (both at Volkswagen and at Porsche AG). Investors argued this structure created conflicts of interest, governance weaknesses, and hindered board independence.
  
  

• Thames Water (UK): The UK-based water services firm faced scrutiny when its chairman held chairmanships in both the operating company and its controlling holding company. Despite the company being heavily indebted, it paid large dividends which regulators considered “unjustified”, raising questions of whether management was prioritising interests other than those of the shareholders.
  
  

• ICICI Bank (India): In India, ICICI Bank became a well‐cited case of potential agency conflict when its then CEO was alleged to have favoured a corporate group (Videocon) with a large loan from ICICI Bank in 2012, which later turned into a non-performing asset. The bank’s ownership was widely distributed, with limited active concentrated shareholders, which meant weaker monitoring of management decisions.
  
  

These examples illustrate how the classic shareholder-vs-manager misalignment has evolved: now we also see manager-shareholder conflicts, dominant controlling shareholders, and structural issues in board composition and oversight.

How the Agency Problem Manifests: Typical Scenarios

• Executive over-compensation: Managers may award themselves generous pay or bonuses even when company performance is weak.
  
  

• Risk aversion or over-investment (“empire building”): Managers may avoid beneficial but risky projects to protect their jobs, or pursue acquisitions to increase their power rather than shareholder value.
  
  

• Information asymmetry and weak monitoring: With limited transparency or oversight, agents may act in self-interest.
  
  

Mitigating the Agency Problem: Governance Frameworks & Tools

To align the interests of agents and principals, companies should consider the following mechanisms:

1. Performance-Based Incentives
   
   

• Link manager compensation (bonus, stock options, restricted shares) to long‐term shareholder value, not just short-term metrics.
  
  

• Incentive design should discourage excessive risk‐taking or empire building, and instead encourage meaningful value creation.
  
  

2. Robust Monitoring & Transparency
   
   

• Independent audit committees, external auditors, regular internal controls.
  
  

• Clear financial disclosures and open shareholder communication reduce information asymmetry.
  
  

• Active shareholder oversight and board scrutiny.
  
  

3. Strong Corporate Governance Structure
   
   

• Independent board members, clear separation of roles (e.g., CEO vs Chair), strong ethics and oversight culture.
  
  

• Governance policies that define roles, responsibilities and decision‐making authorities.
  
  

• Engagement of minority shareholders and protection against dominance by controlling shareholders.
  
  

4. Shareholder Engagement & Activism
   
   

• Allow shareholders meaningful voting rights, say on pay, board composition and major strategic decisions.
  
  

• Institutional investors and proxy advisors play a vital role in pushing governance reform and reducing agency risk.
  
  

Conclusion

The agency problem has moved from theory into practical boardroom relevance. When management’s interests diverge from those of the shareholders, companies risk sub-optimal decisions, reduced value, reputational damage and regulatory scrutiny. The recent examples from Volkswagen, Thames Water and ICICI Bank show that even high-profile public companies are vulnerable.

For companies looking to build sustainable value, the message is clear: understand the agency risks, implement governance and incentive frameworks that align interests, and foster a culture of transparency and accountability.