Example 1

1. Publicly held firms have agency problems due to conflict of interests between two parties within the firm. Normally within a public firm all parties are supposed to act in the best interest of each other. Well, sometimes that doesn't exactly happen which causes problems among the agency. Typically agency problems arise between executive management and stockholders of the company due to struggle of power.

2. The main mechanism to deal with agency problems is compensation through annual bonuses, performance shares, and executive stock options. All of these are tools to avoid conflict and get the most out of your employees and management. This helps align management's interests with those of the stockholders that way everyone is on the same page. Compensation can also be used to retain experienced managers to help run your company like it's supposed to run.

3. Board of directors are composed to represent stockholders among the company. These individuals make crucial decisions that affect the lifespan of the company, every company must have a board of directors to be successful. Boards can be independent by not having every board member make the crucial decisions for the company but more or less pay the fees that come their way. They are the company's cash flow, not their decision makers. Boards that are less independent have every board member act together as a team to decide what is right for the company. There is no outsider cash-flow and every board member is active in the pursuit of success with the company.

4. CEO's could take pay-cuts to reduce the power hungry managers and stockholders from getting greedy and causing conflict. This is actually a real issue in our world today because not too many CEO's out there are going to take less money for any reason. They feel that they have worked their entire lives to get to where they are now and they should never settle for less. However, CEO's like Steve Jobs who took almost nothing in salary for the sake of the company have the company's long-term interest in mind. It all depends on the person and company and what agency problem they are trying to suppress.

Example 2

An agency problem exists when leaders of a company, such as executive officers, have interests that do not necessarily align with the interests of stockholders who have a stake in the firm. Public corporations must deal with conflicts of interest like this, because actions that benefits executives, like CEOs, often create short term benefits; stockholders prefer the company to take actions that create more long term success for the company. For example, CEOs usually gravitate towards options that increase current salaries at the expense of jeopardizing future financial success of the company.
One of the most likely ways to deal with an agency problem is by making CEOs and other executives possess company stock. By requiring CEOs to invest company  stock, they will have more of a stake in the future performance of the firm. As a result, CEOs will be more likely to weigh short term and long term benefits against each other.
Another way of handling an agency problem is by managing CEO pay. Many people criticize the massive paychecks CEOs receive (often hundreds of millions of dollars). Others argue that it is necessary to maintain competitive salaries to attract top talent, who will help the company grow. However, such high salaries are often viewed as unfair, and many companies, like Whole Foods, have established caps on employee salaries. By capping salaries, firms can potentially lessen the potential damage that may result from CEOs making decisions to increase their own salaries.
Finally, a board of directors is a group of appointed people who oversees the activities of an organization. Boards also help result agency problems, which is highly dependent upon the composition of the board. Boards are usually made up of varying mixes of board insiders (those who are employed inside the organization) and board outsiders (those who are employed outside the organization). In some situations, CEOs also serve as chairman of the board of directors, which is known as CEO duality. Such as situation should be avoided in order to also avoid an agency problem.

Example 3

When a company is publicly-held, they begin to sell a portion of their company to people not directly involved in the day-to-day decision making.  When you are looking into the mind of most CEO's, their main interest is their own personal benefit.  These benefits include higher salaries and higher job stability.  If a CEO was focused primarily on this, he would act to gain short term benefit instead of long-term growth of the company.  Shareholders', on the other hand, main interest is the constant long-term growth of the stock price.  When this conflict of interest arises, there is an agency problem.

The best way to protect against these agency problems is to either elect or appoint a board of directors.  A board of directors is used to oversee the activities of an organization or corporation, and usually, the primary interest of the board of directors is the shareholders.

A board of directors can be composed in many different ways.  Some companies prefer board insiders.  These people are generally employed inside of the organization.  This is beneficial because the board would be made up with people that are familiar with the company already.  Others prefer board outsiders.  These are people that are employed outside of the organization.  This can be useful because you get a set of eyes watching over the company that aren't directly involved in the operations.  They can be be unbiased, as well as come up with fresh new ideas.

In order to reduce the risk of agency problems, CEO's can be compensated in different ways.  Most CEO compensation packages are made up of three different aspects: guaranteed salary, cash bonus, and stock options.  Guaranteed salary is the only part of CEO compensation that is fixed.  Cash bonuses come when the company performs well under the CEO.  Stock options are another useful part of compensation that can motivate the CEO to act in their best interest for the shareholders.