The Agency Problem of Majority Vs. Minority Shareholders: The Tug of War

An agency problem is said to arise whenever the welfare of one party, termed as the principal, is dependent upon the actions taken by the other party, termed as the agent. Here, the main problem lies in motivating the agent to act in the principal’s best interest, rather than simply in the agent’s own interest. “Information Asymmetry” can be said to be the foundation of agency problems, which eventually leads to a conflict of interest between the parties. This further gives rise to the Agency Costs, which are the expenses associated with the resolving of the disagreement or conflicts of interest and managing the relationship between principal-agent. While there can be multiple types of agency problems in a company, the problems between majority and minority shareholders of a company are of concern for this article. Interestingly, both the majority, as well as minority shareholders, can act as the principal and agent, depending on the shares held by the shareholder, and the type of resolution (ordinary or special) that is required to be passed for the decision-making.