Agency Theory and

Governance
Bureros | Diola | Vapor
Agency theory
AGENCY THEORY STAKEHOLDERS THEORY

- Focus on shareholders alone - Benefit is maximised if the

as the intended beneficiaries business is operated by its
of a business. management on behalf of all
stakeholders.
Common Feature Between AGENCY
AND STAKEHOLDER THEORY:

The management of the firm is believed to

be acting on behalf of others.
Agency Theory and Asymmetric Power

Custodians managing in
best interest of the owners

All other stakeholders are

largely irrelevant

Managers
 Agency Theory and Asymmetric Power

Benefit is maximised if the

management is operated
on behalf of all stakeholders
and returns are divided
appropriately.

However, such mechanism

which has universal acceptance
does not exist.
Stakeholder Theory
 SIMPLE MODEL OF AGENCY THEORY

PRINCIPA
AGENT
L

And a modernist view of the world . . .

PRINCIPA
L AGENT

PRINCIPA PRINCIPA
PRINCIPA AGENT AGENT
L L
L AGENT

PRINCIPA PRINCIPA AGENT

AGENT
L L
 According to Scherrer and Greven (2001) , almost 10% of
he total value of the commodities in the world
market are produced in violation of the fundamental
ghts of workers.

Consequently, agency theory fails as a mechanism

or directing managerial behaviour.
 AGENCY THEORY

FIR M : Exists for b en ef i

t of ow n ers
M A N A G ER S : D ecision -m akers
* Th e th eory is p ositive rath er th an n orm ative

A G EN C Y R ELATIO N S H IP :
P R IN C IPA L
A G EN T

* U TILITY valu e or b en ef i
t
 INFORMATION ASYMMETRY

MORAL HAZARD - post-decision

consequences

ADVERSE SELECTION pre-decision

situation
LIMITATIONS OF AGENCY THEORY

Based on a single-period model

Both Principal and Agent are rational
utility maximisers is questionable
Analysis is limited to 1 Principal and 1
Agent. (not applicable to multi-agents
& multi-principal)
 MANAGERS & BUSINESS ETHICS

Business Ethics

McCoy (1985) , Ethics need to be at the

core of business behavior and that
effective business management is based
upon ethical behavior
 THE NATURE OF
GOVERNANCE

" the exercise of political authority and then

the use of institutional resources to manage
society's problem "

-World Bank
Principles of governance

Transparency
Rule of law
participation
Responsivenss
Equity
Efficiency and effectiveness
Sustainability
Accountability
 Developing a Framework for
Corporate Governance

UK Corporate Governance Code

Thank you.
(Sankyu)