1. Agency conflicts and costs The nature and effects of agency conflicts Agency conflicts are a special example of a conflict of interest; specifically, they are created by the relationship between and result from inconsistencies or disputes between the interests and motivations of the different parties. The magnitude of these conflicts may be made larger or smaller by the environment in which they occur and the availability of techniques or events to prevent, reduce, or rectify them. For example, in businesses managed by professional managers, managers frequently have less financial and emotional commitment to the business than the firm's owners (the firm's common shareholders). The of ownership and management and the of decision making by the owners to the professional managers create an environment in which these conflicts can take root. Left unaddressed, these conflicts can produce significant real and opportunity costs that the firm's shareholders and other stakeholders must bear. Examples of management behaviors that are not in the best interests of the firm's shareholders include shirking, an excessive consumption of perquisites, an excessive concern with job security, reduced or excessive risk taking, and/or undertaking activities that are principally intended to expand or enhance a manager's ego, prestige, or power. To prevent, reduce, or correct these conflicts between their managers and themselves, shareholders often have to incur additional real costs called costs