 In any agency relationship, conflict of interest is bound to occur. This conflict of interest may stem from many sources and an effective corporate governance is needed to work on these sources so that efficient functioning can be ensured across the corporation. The conflict of interest may create a problem in the relationship among all stakeholders like shareholders, directors, managers, creditors, and many others. But the problem is much significant among the relationship in managers and the shareholders and directors and the shareholders. How the corporate governance system addresses these two problems in particular. A strong corporate governance system ensures mitigation of conflict among the stakeholders very well. As we know that managers are assumed to work for the best interest of the shareholders and in doing so it assumes that the interest of the remaining stakeholders is served as well. For example, we know that managers are assumed to maximize the wealth of the shareholders and in reaching this objective, we can assume that the managers have created sufficient funds to meet the needs of the employees and the creditors as well. In any modern corporate firm, managers regulate companies operating financial and investment decisions for the owners. Generally firm raises capital in two ways. We know that although the whole of the profit goes to the shareholders, but sometimes a part of the profit is retained in the firm. This retention is commonly known as retained earnings. So retained earnings is one form in which the capital of a firm can be raised. The other form is the issuance of share capital or the stocks. So these are the two sources in which a firm can generate its funds. Now whatever the source type is there, managers are responsible to manage funds exclusively, effectively and efficiently to maximize the shareholders wealth. But we see that in many cases the managers fail to do so. Reasons of this failure are so many. This sometimes misuse firm's capital through unwanted and expensive acquisitions just to secure their jobs, their perks, salary and power in the organization. Managers acquire expensive and countless perks through dealing themselves. They enjoy perks and the shareholders bear the cost. Sometimes managers take high risk investments that pay off to the managers alone. For example, if a manager's compensation is tied to the stock option and in case of higher prices, the managers benefit. But if the prices of the stock go low, the managers may not suffer any loss. But in those investments which are risky but profitable and it is expected that positive cash flows would be generated. But managers may not go for these risky investments just to save their jobs. So in this way, managers sometimes fail to serve the interest of the shareholders and this creates a serious problem of agency relationship between the managers and the shareholders. To avoid this conflict of interest between managers and the shareholders, full transparency is needed for the investors and the other stakeholders to evaluate the company's financial position and its riskiness. Strong corporate governance system works in three ways. It monitors managers' activities. It works for better rewarding for the good performance by the managers and it disciplines the managers to act in the best interest of their owners, I mean shareholders. An effective corporate governance system ensures proper checks and balances to reduce the conflict of interest and the probability of male practices in this regard. The second significant problem in the relationship is between the directors and the shareholders. We know their directors act in the form of board of directors. The board has many purposes. Among these purposes, we may count few, like directors act as intermediary between the shareholders and the managers. The transforms owners' wishes into workable business strategies for the managers. They primarily serve the interests of the shareholders, directors monitor the managers' performance. The directors of any corporate firm approve mergers and acquisition policies. They approve those policies that are in the best interest of the shareholders of the firm. They approve audit contracts, they review audit reports and they review the audited financial statements to ensure whether these financial statements depict true and fair review of state of affairs of the business. They set incentive plans for the managers. They discipline managers through the provision of perks and accountability. Along with these important objectives of board of directors, still there is a problem and that problem is the conflict of interest in relationship between directors and the shareholders. Sometimes directors match their objectives with those of the managers and in this way they fail to work for the interests of the shareholders. How this happens? It happens if the board of directors is not independent as a whole or it does not contain even a single independent director. These board members may have a relationship with the managers, like any board member may have some lending relationship between one of the managers' firm. Likewise, any of the board members may have some consultancy business with any of the managers of the firm. In this way, sometimes we see that companies have interlinked boards and a board member in any company may work as a board member in other member company of the parent. In this way, the board member may not work for the best interest of the shareholders of its parent company or in which it is the principal board member. Another reason of this conflict is that the board members sometime are offered lavish compensation package and to retain this package board member may not work independently and in this way this impairs the relationship between the board members and the shareholders.