Agency Problems. Many people claim that because of the separation of ownership and control in a corporation, managers have little incentive to work in the interests of the shareholders when this means working against their own self-interest. Economists call this an agency problem—when managers, despite being hired as the agents of shareholders, put their own self-interest ahead of the interests of shareholders. Managers face the ethical dilemma of whether to adhere to their responsibility to put the interests of shareholders first, or to do what is in their own personal best interest. This agency problem is commonly addressed in practice by minimizing the number of deci- sions managers must make for which their own self-interest substantially differs from the inter- ests of the shareholders. For example, managers’ compensation contracts are designed to ensure that most decisions in the shareholders’ interest are also in the managers’ interests; shareholders often tie the compensation of top managers to the corporation’s profits or perhaps to its stock price. There is, however, a limitation to this strategy. By tying compensation too closely to per- formance, the shareholders might be asking managers to take on more risk than they are com- fortable taking. As a result, managers may not make decisions that the shareholders want them to, or it might be hard to find talented managers willing to accept the job. On the other hand, if compensation contracts reduce managers’ risk by rewarding good performance but limiting the penalty associated with poor performance, managers may have an incentive to take excessive risk