Agency problems are pervasive in modern economies due to the extensive division of labor and

specialization. Therefore, how to solve them within organizations, or between individuals or

organizations, is a key determinant of productivity of organizations as well as countries. There is
indeed considerable evidence of tremendous difference in productivity of firms in the same
industry, after accounting for measured inputs such as capital intensity.
A shareholder is an individual or institution that legally owns one or more shares of stock in a
public or private corporation. Shareholders may be referred to as members of a corporation.
 
A government is the system or group of people governing an organized community, often
a state.[
Agent: One who acts for, or in the place of, another (the principal), by authority from him; one
intrusted with the business of another; a substitute; a deputy; a factor
.
 principal: One who directs another (the agent) to act on one′s behalf.

The agency problem is a conflict of interest inherent in any relationship where one party is
expected to act in another's best interests. In corporate finance, the agency problem usually
refers to a conflict of interest between a company's management and the company's stockholder
the manager, acting as the agent for the shareholders, or principals, is supposed to make
decisions that will maximize shareholder wealth even though it is in the manager’s best interest
to maximize his own wealth.
Agency Relationship between Government and the Shareholders
Shareholders and via extension, the company they own operate within the environment requiring
the charter or license granted through the government.  Such government will expect the
company and via extension its shareholders to activate the business in a manner that is beneficial
to the complete the society and economy.
In this agency relationship the government is the principal whereas the company is the agent.  So
it becomes an agent when it has to gather tax on behalf of the government particularly
withholding tax and PAYE.
The company carries on business also on behalf of the government since the government does
not have sufficient capital resources.  It offers conductive investment environment for the
company and share in the benefit of the company in form of taxes.
The company and its shareholders as agents may obtain some actions which might prejudice the
position or interest of the government like the principal.  These actions comprises as:

o Tax evasion: This comprises the failure to provide the exact picture of the profits or
earnings of the firm to minimize tax liability.
o Involvement in illegal business activities through the firm.
o Lukewarm answer to social responsibility calls via the government.
 o Lack of sufficient interest in the safety of the staff and the products and services of the
company involving lack of environmental awareness concerns via the firm.
o Avoiding certain categories and areas of investment coveted via the government.

Agency problem Government

 The principal-agent problem can occur in government when officials have incentives

to act in their own interests rather than as agents 
 Principal-agent problems occur because government officials lack the knowledge to
act effectively as agents for the people.
 The principal-agent problem describes challenges that occur when agents and principals
have conflicting interests.

 The principal-agent problem can occur in government when officials have incentives to
act in their own interests rather than as agents for the people, who are the principals.

 Elected officials, unelected officials, and lobbyists all face different pressures to act
against the public interest.
 Sometimes, principal-agent problems occur because government officials lack the
knowledge to act effectively as agents for the people.
 Principal-agent problems in government can be reduced by changing incentives to
minimize conflicts of interest.

Agency problems of shareholders

 Shareholders of unfair prejudice caused to them by majority shareholders, and breaches

of fiduciary duty by company directors.
  In many cases though the current problem you are facing has not been foreseen in the
agreement or there may be no written partnership or shareholder’s agreement in force.
  There are allegations of wrongdoing which need to be investigated further so that any
liability can be established and the amount of compensation ascertained.
     Colluding with management where independence is compromised
    Demanding outrageously high audit fees thus reducing company profits
   Failure to apply professional care and due diligence in the performance of their work

Solutions to the Agency Problems between Shareholders and the Government

1. Contract design
The main purpose of contract design is the creation of a contract framework between the
principal and the agent to address issues of information asymmetry, stimulate the agent’s
incentives to act in the interests of the principle, and determine monitoring procedures.

2. Performance evaluation and compensation

The agent’s compensation is the primary method of aligning the interests of both parties. In order
to address the principal-agent problem, the compensation must be linked to the performance of
the agent.

3. Incur monitoring costs

E.g. the government incurs costs associated with:

 Statutory audit
 Investigations of companies under Company Act
 Back duty investigation costs to recover tax evaded in the past

 VAT refund audits

4. Lobbying for directorship (representation)

The government can lobby for directorship in companies which are deemed to be of strategic
nature and importance to the entire economy or society e.g. directorship in KPLC, Kenya
Airways, and KCB etc.

 5. Offering investment incentives

To encourage investment in given areas and locations, the government offers investment
incentives in form of capital allowances as laid down in the Second schedule .

 6. Legislations
The government has provided legal framework to govern the operations of the company and
provide protection to certain people in the society e.g. regulation associated with disclosure of
information, minimum wages and salaries, environment protection etc.

conclusion.
  Good governments have a duty to promote the general welfare. Their nation now threatens itself,
by not resisting a tyrantless tyranny of errors in the ideas that dominate its political. But a free
democratic people can only be subdued by elective errors. And such errors are possible only if the
people wrongly understand their real interests. Properly understood, these interests must build on, to
use the words of the Declaration of Independence, “Laws the most wholesome and necessary for
the public good , all forms of bad government the essential error that they rule for the benefit of the
rulers. These essays expose errors that have loosened our grip on how “of the people,” and “by the
people,” must meet the just end of all good government, which is ruling “for the people” as a whole.
Are leaders governing “for the people.

https://www.researchgate.net/publication/24113035_Stakeholders_vs_Shareholders_in_Corporate_Go
vernancetps://www.mckenzielaw.co.uk/business-services/directors-partners-shareholders-problems/

https://www.managementnote.com/agency-problem-shareholders-managers-financial-management/