Because owners have access to only a relatively small portion of the information that is available to executives about the performance of the firm and cannot afford to monitor every executive decision or action, executives are often free to pursue their own interests. This condition is known as the moral hazard problem. It is also called shirking to suggest “self-interest combined with smile.”
As a result of moral hazards, executives may design strategies that provide the greatest possible benefits for themselves, with the welfare of the organization being given only secondary consideration.
Moral Hazard Problem: An agency problem that occurs because owners have limited access to company information, making executives free to pursue their own interests.