Agency theory:

Agent is a person who is performing an act for another person, called the principal. An agency, in general terms, is the relationship between two parties, where one is a principal and the other is an agent who represents the principal in transactions with a third party. During their relationship various problems are face by these two parties such as the difficulties in the motivating agents to act in the best interest of the principal rather than in his or her own interest and other such problems. Agency theory is concerned with resolving these problems that can exist in agency relationships between principals (such as shareholders) and agents of the principals (for example, company executives). The two major problems that agency theory addresses are:

1. Moral Hazard: Moral hazard is the tendency of the person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior. This problem arises when the principle fails to perfectly monitor the agents behavior due to which the agent tends to undertake less effort than the principle consider desirable. So, moral hazard problem is the temptation of imperfectly monitored worker to shirk their responsibility.

2. Conflict of Interest: Conflict of interest means the desires or goals of the principal and agent conflict. The conflict of interest occurs when the principal and agent is involved in multiple interests, one of which could possibly corrupt the motivation for an act in another. The conflict may arise not only in the goals of the people it can also be seen in the attitude of two parties towards the risk involved in the particular situation

Basically an agency problem occurs when the interests of stockholders, the board of directors, and the management of the company are not perfectly aligned. In publicly held companies, there are a variety of individuals with an interest in the performance of the company. The managers and executives who run the company on a day-to-day basis, the shareholders who own the shares

of the company and the board of directors who oversee the company's business development all may have different aims or ideas of how the business can be run. Executives of a organization may, for example, be interested in achieving good long-term growth of the company. Since their performance is measured by how the company does in both short and the long run, the decisions they make are based on the goals of generating profit both now and in the future. This may mean they wish to engage in capital expenditures now to secure a possible benefit or gain in the future. Many stockholders, on the other hand, may be focused on the immediate earnings and returns of a company, as these are important metrics in the valuation of the price of a share of stock on the open market. A stockholder who doesn't intend to hold the company long term may prefer a dividend be paid instead of that the money be reinvested to achieve a long-term gain for the company. This is just one example in which the interests of the shareholders may not be perfectly aligned with those of the corporate governance. A more dramatic example of an agency problem may occur when the corporate executives are out to maximize their own compensation, sometimes at the expense of the company or shareholders. The board of directors may also have a difference of opinion from the shareholders or the executives, aiming to take the company in a different direction still. The board may have the power to remove a chief executive or manager from power, but the shareholders may disapprove of this decision. Conflicts can occur among all three entities, creating issues that are difficult to resolve. When an agency problem exists, it can be difficult for a company to resolve. Shareholders generally get a vote and can vote with the board of directors against the executives, for example. When the problem is resolved in this manner, the executives could end up forced to follow a course of action they do not entirely agree with, as the majority rules.

Real Time Example of Agency Problem

The dispute between employees and management (owner) of KFC fast food and Pizza hut ,Nepal is the real time example of Agency Problem. KFC and Pizza Hut entered Nepal in 2009, November 23 as the first multinational food chain, run by Devyani International, and opened their outlet at Durbar Marg and Thapathali. The international chain employees some 180 Nepalese. The dispute between Management and employees at the KFC started after workers tried to register a union. But the management denies employees to do so. And then the dispute started. Employees have argued that the multinational company should also follow the law of land . Later on, this dispute result to a manhandling and assaulting of human resource manager Krishna Prasad Sharma at the Bagmati Zonal Labour Offfice. Due to this reason Devyani International has shutter down KFC and Pizza Hut by rising the security issue. The dispute between Management and Employees leads to a closure of international fast food outlet, KFC and Pizza Hut, at Nepal. Later on, after few time it started its business again.

Solution Outlets of international fast food chains KFC, Pizza Hut and Cream Bell resumed operation on September 17, 2012 after a three point agreement between the workers and the management. KFC, the biggest fast food chain in Nepal, had remained closed for over a month. On August 14, 2012 Devyani International, a subsidiary of Varun Beverages which operates outlets of KFC and Pizza Hut in Nepal had written a letter to authorities with announcement of immediate closure of all the four KFC and Pizza Hut restaurants running in the capital. In order to disrupt our operations, some staff have physically attacked and threatened to kill the senior managers, the letter read.