In management theory, what conflict arises when owners’ goals differ from those of hired managers?

In management theory, the conflict arising when owners’ goals differ from those of hired managers is called the principal-agent problem.

The principal is the party that delegates a task, such as a shareholder who hires a company executive. The agent performs the task but may have different incentives, information, or risk preferences. Because the principal cannot observe every action, the agent may make choices that benefit the agent more than the principal.

Corporate governance uses tools such as performance-based pay, audits, board oversight, disclosure, and ownership incentives to reduce this conflict. None eliminates it completely, because monitoring has costs and contracts cannot specify every future situation.

Moral hazard is related but narrower. It describes behavior that becomes riskier when someone is protected from the full consequences of that behavior. Adverse selection concerns hidden information before an agreement, whereas moral hazard usually concerns hidden action after an agreement.