This document provides a summary of Agency Theory and the Agency Dilemma, outlining the pros and cons of this theory. It also provides an overview of Stewardship Theory and the Critique associated with the theory.
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Agency Theory
A contract under which one or more people (principal : shareholders)
engage (agent directors)
another person/s : to act on their behalf
,
delegating decision-making authority.
Agency theory assumes the core friction is the conflict of interests
between the different parties involved in the
expecting managers
company ,
and shareholders to have those potentially conflicting interests
.
If act
both
in
parties are
utility
their own interests and not
agents will tend to
always
...
maximizers
the best interest in
of their principal Jensen and Meckling (1976)
.
Agency Dilemma
An exists if principal , such shareholder
agency problem as ,
a a
employs CEO executive team
an
agent , such as the and their ,
to
Lead the the principal's behalf
company on .
The reason
why the issue arises whenever ownership or membership
is separated from executive
management can
partly be explained
by Smith (1776) :
"The directors of companies ,
being manager's
other people's cannot be expected to
money ,
watch over it with the same
vigilance with
which they watch over their own
.
11
Therefore , its effects are not limited to listed companies and
their agents it occurs in private
companies not for profit orgs,
, ,
professional institutions and governmental bodies ,
Information ! Directors know more about the corporate
situation shareholders , than who
rely on the directors to decide
what information they should have (above the minimum required by
regulation and
company law) Case in
Point
Corporate Governance is the response to
the
agency
dilemma , adding the demands for : US : Theranos
I -
Transparency Bad Blood
11.
Reporting UK : Robert
I.
Accountability Maxwell
iv .
Audit
v Independent directors
VI .
Corporate Government Codes
To the requirements of Company Law ,
Securities Legislation ,
Regulators Rules
,
and Stock
Exchange .
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