What is best for the asset owner (principal) is usually not best for the delegated fund manager (agent). Principal–agent conflicts can be mitigated by appropriate governance structures and contracts. Poorly designed benchmarks cause agents to work against the asset owner’s goals. Effective boards can advocate for principals’ interests. Boards should build processes for investment decisions rather than making those decisions.
Keywords: principal–agent, agency problem, optimal contract, Irrelevance Result, nonlinear contract, delegated portfolio management, adverse selection, moral hazard, factor benchmark, financial advisor, boards, investment decisions
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