What is agency cost and what are its types? How can a company minimize agency cost and align the interest of manager and shareholder?

Answer (a) Meaning of Agency Cost: Agency Problem is the chances that managers may place personal goals ahead of the goal of owners. Agency Problem leads to Agency Cost. Agency cost is the additional cost borne by the shareholders to monitor the manager and control their behaviour so as to maximize shareholders wealth. Types of Agency Cost: Generally, Agency Costs are of four types (i) monitoring (ii) bonding (iii) opportunity (iv) structuring. Following efforts have been made to address the issues of minimizing agency cost and align the interest of manager and shareholders: Managerial compensation is linked to the profit of the company to some extent and also with the long-term objectives of the company.Employee is also designed to address the issue with the underlying assumption that maximisation of the stock price is the objective of the investors.Effecting monitoring can be done.