Basic Principles of Agency Theory

Agency theory focuses upon relationships between parties where one delegates some decision-making authority to the other. The principal would delegate some decision making authority to the agent who, in turn, would be responsible for maximizing the principal’s investment in exchange for an incentive, such as a fee. Agency relationships are designed to increase value to the parties involved. However there are costs involved including engaging in the relationship, monitoring its progress and enforcing it. These costs are influenced by the different attitudes of principals and agents to risk and their different access to information (‘information asymmetries’). The agent for instance has private information to which the principal does not have access and cannot observe accurately. This can allow the agent to increase their bargaining power in the relationship. Where the desires of the principal and agent conflict, and the agents are not provided with proper incentives or are constrained in some manner, perhaps through the terms of contract, agents may act more in their own interests than those of the principal. This is known as an ‘agency problem’. In the relationship between shareholders and management the agency problem is often portrayed as shareholder principals having goals of value maximization while management agents’ goals are those of self-aggrandizement; the consumption of value to build their own empires.

Sumber:
Jenkins, M., Ambrosini, V., & Collier, N. (2016). Advanced Strategic Management. New York: Palgrave.