Agency Theory or Principal Agent Theory is the relationship that involved the contractual link between the shareholders (the principals) that provide capital to the company and the management (agent) who runs the company. The principals will engage the agent to carry out some services on their behalf and would normally delegate some decision-making authority to the agents. However, as the number of shareholders and the complexity of operations grew, the agent, who had the expertise and essential knowledge to operate the business and company tend to increasingly gained effective control and put them in a position where they were prone to pursue their own interests instead of shareholder’s interest.
Agency theory addresses three types of problems that could exist from the separation of ownership and management which might consequently affect firm value later. They are the effort problem, the assets’ use problem and different risk preferences problem.
The first problem is the effort problem which concerns whether or not managers apply proper effort in managing corporations so as to ...
Can you think of one threat that arises from the use of agency theory in developing measures aimed to prevent future banking and/or financial failures?
The agency problems or conflicts are continuously happening between the principal and the agent. It particularly arises when an interest conflict occurs between the principal and the agent. In terms of finance, there are two core agency relationships; managers and stockholders and managers and creditors. To balance the interests and satisfactions between managers and stockholders which helps firm to improve performance, there are a variety of different measures have been generated and implemented by Telstra in order to optimize the bond and monitoring costs.
So the theory behind the whole argument is that while the shareholders are involved in the Business they simply do not own the business.
In the principal agent problem, a party (the agent) is appointed to act on the behalf of another party (principal), however when the incentives of both parties are not perfectly aligned, in other words, when the agent’s interests differ from the principal’s a problem becomes present. The agent would become more likely to act in his or her own interests, rather than the interests of the principal.
This separation between ownership and managerial control in this instance can be problematic as the principal and the agents have different interests and goals. In a large publicly traded corporation such as NOL/APL, shareholders (principals) lack direct control when the CEOs (agents) make decisions t...
Carpenter, M., Bauer, T., Erodogan, B., & Short, J. (2013). Principles of management. (2nd ed.).
An agency relationship is often formed upon the signing of a contract. Both the agent and the principal have specific powers and certain duties they must fulfill. It is important to understand when this relationship begins and ends, and how to recognize when an agent could potentially breach his or her fiduciary duty.
Besides of that, the importance of principles of separate legal entity was first established in the landmark case of Salmon v Salomon & Co Ltd (1897) and the principal of separate legal entity is also enshrined in section 16(5) of the Companies Act 1965. Additionally, the effect of corporate personality is to create a “veil of incorporation” between the shareholders and the company, preventing recourse to the shareholders for the debts of the company. By the way, given that it is impossible to envisa...
Robbins, Stephen P., David A. DeCenzo, and Mary K. Coulter. Fundamentals of Management: Essential Concepts and Applications. 7th ed. Upper Saddle River, NJ:
2. Kinicki, Angelo, Williams, Brian Management, a practical introduction, Second Edition. New York, New York, McGraw-Hill 2006/2003
Robbins, S. P., & Coulter. M. (2014). Management (12th ed.). Retrieved from: Colorado Technical University eBook Collection database.
5. Business is business and every firm has to find ways to produce and market its goods. Why, then, might managers be unable to successfully apply the techniques and concepts they have learned in
Over the past hundred years management has continuously been evolving. There have been a wide range of approaches in how to deal with management or better yet how to improve management functions in our ever changing environment. From as early as 1100 B.C managers have been struggling with the same issues and problems that manager’s face today. Modern managers use many of the practices, principles, and techniques developed from earlier concepts and experiences.
An agency relationship is formed between two parties when one party (the agent) agrees to represent another party (the principal). Normally, all employees who deal with third parties are considered agents. Principal-Agent relationships are defined as the understanding that the agent will act for and on behalf of the principal. (Cheeseman) The agent assumes an obligation of loyalty to the principal that he will follow the principal’s instructions and will neither intentionally nor negligently act improperly in the performance of the act. An agent cannot take personal advantage of the business opportunities the agency position uncovers. A principal-agent relationship is fiduciary, meaning these obligations bring forth a fiduciary relationship of trust and confidence. As such, an agency relationship is governed by employment law.
An agent was defined by L. Alverstone in The Queen v Kane as ‘any person who happens to act on behalf of another’. In the situation between Chris and Ken the agency was created by an express oral agreement between the principal and an agent. K was authorised to act on C’s behalf to find out the best price obtainable for a bag of gemstones. C limited K’s authority with no authorisation given for the actual sale of chattels. If an agent acts outside his actual authority, he may be liable to his principle for the breach of contract and to the third party for a breach of implied warranty of authority. However, the situation where the principle is not disclosed and there is no written contract as such, the principal might have to bear the losses