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The underlying assumption of agency theory is that individuals will almost always act in their own self-interest and that this behavior may directly conflict with the firms best interests. Additionally, agency theory proposes that the firm is a nexus of contracts between these individuals, with the goal of ultimately limiting or controlling conflicting interests. There are several conflicting groups within a corporation that contribute to agency theory, but the most notable conflicts are usually between managers and owners (Wolk, Dodd & Rozycki, 2017). According to Fontrodona and Sison managers are agents of shareholders who, as principals, seek returns on their investment. Managers can sometimes act in their own self-interest by choosing accounting methods that will increase income and thus increase their compensation. For example, a manager may choose the LIFO inventory valuation method to lower income taxes and increase income for a year in order to get a larger bonus. However, this valuation method may not be in the best interest of the corporation. Owners want returns on their investments in the form of dividends and will sometimes make poor decisions to further their own self-interest. For example, in an annual stockholder meeting an owner may vote for dividend disbursements even if the firm should retain the profit for future expansion. There are solutions to help prevent or at least control conflicts between managers and shareholders. For example, the firm could provide incentives for managers and employees that align their interests with those of the owners. Additionally, the firm should seek to give mangers motivation and satisfaction in their positions, so that they will be more willing to do what is in the best interest of the firm (Fontrodona & Sison, 2006). Do you agree or disagree with the above?

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