Why an agency relationship exisits in corporations?

An agency relationship exists in corporations because shareholders (principals) delegate decision-making authority to managers (agents) to run the company on their behalf. This arrangement allows shareholders to benefit from the expertise and day-to-day management provided by executives, while also enabling them to diversify their investments. However, the separation of ownership and control can lead to conflicts of interest, as managers may prioritize their own goals over those of the shareholders. Thus, mechanisms such as performance incentives and oversight are often implemented to align interests and mitigate potential agency problems.