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The Agency Concept
Agency theory says that a company is not a single, unified entity . Agency theory
calls into question the claim that all of the stakeholders in the company (shareholders,
managers, and creditors) have a single goal - value creation. Agency theory shows how, on the
contrary, their interests may differ and some decisions related to borrowing for example or how
products stock options come out of attempts to achieve convergence between the interests of
managers and shareholders to protect creditors . Agency theory analyses the consequences of
certain financial decisions in terms of risk , profitability and, more generally, the interests of the
various parties. Agency theory is the intellectual basis of corporate governance (Corporate
Finance by Vernimmen.com). The main driver for corporate governance is based on the agency
concept. Here corporate bodies are overseen by directors who are appointed by the owners, i.e
stakeholders. The directors formulate a corporate strategy to achieve set objectives and meet
market expectations, and in turn, employ managers and staff to implement this strategy (The
essential handbook of internal audit ing by Spencer Pickett). The directors are considered as
the brain of the company and the managers and staff are the body. It is the board of directors
who make strategies for the company to achieve its objectives. They make decisions and form
concepts or strategies for the company s objectives and create a team for implementation. The
managers and staff are authorized employees who perform the established strategy that should
be implemented.
Agency theory is part of the positivist group theories which derives from the financial
economics literature. It postulates that the firm consists of a nexus of contracts between the
owners of economic resources (the principal) and managers (the agents) who are charged with
using and controlling those resources (Managerial auditing journal by Adams, Michaels B.). A
simple agency model suggests that, as a result of information asymmetries and self-interest,
principals lack reasons to trust their agents and will seek to resolve these concerns by putting in
place mechanisms to align the interests of agents with principals and to reduce the scope for
information asymmetries and opportunistic behavior. (Agency theory and the role of audit ICA
England and Wales 2005). It is having an influence to an agent to perform their task as it
should be. To make sure that an agent will accomplish its task given by the principal. To ensure
that all agents are trustworthy because being an agent are usually more knowledgeable than its
principal. In this kind of relationship we cant avoid that sometimes the principal and the agent
has a different interest that will trigger their trust. And having a different interest an agent can be
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