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Different Agency Theory Relationships

The document discusses three types of principal-agent relationships that are subject to agency theory: 1) Shareholders and company executives, where shareholders as principals can be negatively or positively affected by executives' actions. 2) Investors and fund managers, where investors are principals that may disagree with fund managers based on investment returns. 3) Board of directors and CEOs, where the board as principals can vote against or praise the CEO as agent depending on financial decisions and outcomes. These relationships all involve the principal delegating a task or decision to the agent and potentially disagreeing based on the results or actions taken by the agent.

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46 views

Different Agency Theory Relationships

The document discusses three types of principal-agent relationships that are subject to agency theory: 1) Shareholders and company executives, where shareholders as principals can be negatively or positively affected by executives' actions. 2) Investors and fund managers, where investors are principals that may disagree with fund managers based on investment returns. 3) Board of directors and CEOs, where the board as principals can vote against or praise the CEO as agent depending on financial decisions and outcomes. These relationships all involve the principal delegating a task or decision to the agent and potentially disagreeing based on the results or actions taken by the agent.

Uploaded by

MOHAMMAD 22152
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Different Agency Theory Relationships

When it comes to business and the concept of agency theory, there several
types of relationships that are closely intertwined and are faced with some sort
of disagreement.

Shown below are some of the most in-depth and connected relationships in
businesses that involve a principal-agent relationship and qualify for the
agency theory.

1. Shareholders and Company Executives

As mentioned, the shareholder is represented by the principal. It is because


the shareholder invests in an executive’s business, in which the executive is
responsible for making decisions that affect the shareholder’s investment.

If the company executive acts negatively and reduces the worth of the
shareholder’s stock, it will spark a disadvantageous relationship.

On the other hand, if the company executive were to act ethically resulting in
some sort of financial boost in the shareholder’s stock, a positive connection
will form.

2. Investor and Fund Manager

In such a case, the investor is the principal because they are giving a portion
of their income to the fund manager to allocate on their behalf.

If the fund manager were to invest in volatile stocks and yield a return less
than expected from the investor, a negative relationship begins to form.

Conversely, if the fund manager goes above and beyond and nets a profit
outside of the realm of expectation, the investor praises the fund manager and
there is a healthy linkage.
 

3. Board of Directors and CEO

Up in the hierarchy, the board of directors is represented by the principal


because their financial position and status are decided by the CEO.

If the CEO were to make a wrong financial decision that put the organization
at a deficit, the board of directors is more likely to vote against the CEO in the
next election.

Oppositely, if the CEO were to introduce a new business sector that provided
unprecedented innovation in the market, they would be praised by the board
of directors and would likely stay in power for years to come.

The idea of agency theory is represented by the relationships expressed


above.

All of the interactions and disagreements faced by both the principal and
agent are what make up the entire exploration of the concept.

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