The principal agent problem is an asymmetric information problem. Owners of a firm often cannot observe directly the day-to-day decisions of a management. The decisions and performance of agents are costly and difficult to monitor.
Overcoming the principal agent problem
What is in the best interest of the management is not necessarily the same as the optimum interests of the shareholders. Strategies involve trying to align the aims of these two different stakeholders.
Non-profit Organisation
Businesses that operated commercially but with social welfare and environmental aims in mind. Typically, profits are reinvested for social purpose and social aims.
Private sector Organisation
Private sector organisations are owned by private investors rather than the state.
84% of jobs in the UK are in the Private Sector
Public Sector Organisation
Organisations that are owned and controlled by the state e.g. the NHS, the Police, State Schools.
The NHS employs 30% of all public sector staff, with educationemploying28%
Private limited companies
Corporations whose shares are not listed on a public exchange e.g. McLaren Technology Group, Specsavers, JCB
Social Enterprise
With a social enterprise, profit is reinvested for social purposes rather than for the gain of private investors. E.g. the National Trust, University student unions.