Agency theory is a group of concepts describing the nature of the agency relationship deriving from the separation between ownership and control.
By accepting to undertake a task on their behalf, an agent becomes accountable to the principal by whom they are employed. The agent is accountable to that principal.
Directors (agents) have a fiduciary responsibility to the shareholders (principal) of their organisation (usually described through company law as ‘operating in the best interests of the shareholders’).
Agency theory is a group of concepts describing the nature of the agency relationship deriving from the separation between ownership and control.
By accepting to undertake a task on their behalf, an agent becomes accountable to the principal by whom they are employed. The agent is accountable to that principal.
Directors (agents) have a fiduciary responsibility to the shareholders (principal) of their organisation (usually described through company law as ‘operating in the best interests of the shareholders’).
Agent objectives (such as a desire for high salary, large bonus and status for a director) will differ from the principal’s objectives (wealth maximisation for shareholders)
Key concepts of agency theory:
An agent is employed by a principal to carry out a task on their behalf.
Agency refers to the relationship between a principal and their agent.
Agency costs are incurred by principals in monitoring agency behaviour because of a lack of trust in the good faith of agents.
The most important agency costs are the external audit fee, attending meetings and reading both annual reports and analyst’s reports.
Over here agent principal relationship will be between Directors and Shareholders.
Working between CEO and Production manager is not agency relationship. It’s just an employer employee relationship.
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