 By agency, we mean the relationship between principal and its agent. In a modern corporate entity, shareholders are differentiated from the company's management in a way that the company's shareholders elect from themselves some people as the board of directors and this board of director appoints some officers to run affairs of the company. So a separation concept arises in terms of agent and the principal. Now the management of the company is assumed to be working for the best interest of the shareholders but in real world it does not happen the same. In fact, sometimes the management of a company starts pursuing its own goals on the expense of the shareholders in order to avoid this problem. There is a concept of corporate governance. Now what corporate governance is? Corporate governance simply means running the management of affairs of a company transparently and a key role in this practice is to be performed by the company's chief executive officer commonly known as CEO but sometimes in larger companies CEO also becomes part of the board of directors and this duality of the CEO becomes another problem for the management of the company to run its affairs in the best interest of the shareholders. What is agency relationship? As I have earlier said that there is a relationship between management and the shareholders. Management acts on behalf of the shareholders so it can be said that shareholders act as principal of the management and management acts as an agent of the shareholders. So there is a relationship of agent and principal and this relationship is commonly known as the agency relationship but this agency relationship is not free from problems. These problems then called as conflict of interest. We can define conflict of interest for this particular relationship in the term that let's say the shareholders see an investment opportunity which can increase the market price of their shares in the market but the management of the company also sees a risk in this opportunity and in case of failure the management foresee that may be that there may be a loss of job for them. So the management naturally may not be interested in this investment opportunity and the investment opportunity when lost becomes a cost to the interest of the shareholders. So this is a little example of conflict of interest and conflict of interest creates a cost for the agency relationship commonly we call it as agency cost. This agency cost can be classified into two ways. The first is the direct agency cost. Direct agency cost is also classified in two ways. The first type is the monetary remuneration given to the management in against their services and the second is the monetary remuneration given to the auditors so that it can be pointed out whether the management of affairs of the company is being run transparently or not. The other type of agency cost is the indirect agency cost and this is the cost when a firm or a company loses some investment opportunity. So these are the two examples of cost, cost of agency. Now what are the management goals then in this sphere? Managers generally tend to pursue their own goals on the cost of shareholders expense in the way that they try to maximize the corporate control in their own hands so they can exploit the organizational resources for their own interest and also they try to avoid outsiders interference in their own control in the firm. Now the question arises do managers act in the owner's interest? To answer this question we have to look for two other things. The first thing that is linked with this question is the managerial compensation whether management is compensated well or not. It is linked with the management goals and shareholders goals. So the management goals can be defined further into two groups whether the management have incentivized appropriately or not. They are given appropriate salaries and other benefits or not and number two whether the management is given some sort of promotion in the firm or not. The second is the shareholders goal. Shareholders goal is the value creation and this value creation means that increment in the market price of the share. So in order to work for the best interest of the shareholders it is said that every decision of the management if it creates value for the firm then this means that when management is well pursuing the shareholders goal and ultimately the management will also achieving the benefit it it desires from the shareholders. Second that do managers act in the owner's interest? We have another question. Its second answer is the control of the firm. We know that stockholders are the ultimate controller of the firm. They control their firm through the board of directors and board of directors are responsible for hiring and firing the management. Poor management can be replaced very easily if the shareholders are annoyed with the management. They can call omitting by the board of directors and the management team as a whole can be replaced. This replacement can occur in two ways either through proxy or through takeover. How we can conclude from this discussion? Number one, the shareholders are the ultimate controller in the firm. They control the resources, they control the main power, they control the decisions happened in the firm. Shareholder's wealth maximization it is the only way and it is the only relevant goal of any management in the business concern but we see that management goals are sometimes pursued at the expense of the shareholders and if not in the longer term at least for the shorter period of time stakeholders who they are. Remember that shareholders and management these two parties are not the ultimate beneficiary of any business concern there are other entities there are other parties other persons who claim their interest in the cash flows of the firm and these include creditors, employees, government regulatory authorities, nearby surrounding entities, suppliers all these people have some sort of financial interest in the firm when the firm generates certain cash flows and even these stakeholders not the stockholders these stakeholders try to influence the decisions taken in the company in their own interest.