Agency Theory: Investigating the Principles of Agency Theory

This report delves into agency theory, focusing on the relationships and potential conflicts of interest within business organizations. It examines the interaction between principals (e.g., shareholders) and agents (e.g., executives), highlighting the importance of aligning interests and addressing potential agency problems. The report explores the political, social, and economic aspects of agency theory, emphasizing the role of corporate governance in ensuring that executives act in the best interests of stakeholders. It references key literature to provide a comprehensive understanding of the theory's principles and practical applications in decision-making and strategic management. The report underscores the need for ethical considerations and financial responsibility, particularly within the context of political and governmental oversight, to ensure effective corporate governance and stakeholder satisfaction.

Running head: Agency theory
Agency theory
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1AGENCY THEORY
The main objective of Agency theory is to explain the relationships as well as self-
interest in the business organisations. This explains the interaction between the principals or
agents and the control delegation. Most importantly, it explains the relationship between the
shareholders, who are the principals, and the executives of the company, as the agents
(Namazi, 2013). This theory also explains that the principal’s interest and the agent is not
always same or in alignment. Mainly, three aspect of the agency theory are there: political,
social and economic. However, the concept of it is central to the political theory. Political
activities usually undertaken by the agents and whose agency look forward to inhere the
power to produce effects. The political or government visibility in the agent theory explains
that corporate executives need to have moral as well as financial duty to the act with the
agencies or party’s great interest they serve, particularly all the stakeholders. The theory of
agency related to the corporate governance or politics aims towards addressing the conflicts
of interest for the board members and also explains that, it is necessary for the executives to
prioritize all the interests of the stakeholder or the shareholders (Shi, Connelly & Hoskisson,
2017). Overall, it can be said that the agency theory gives a clear parameters to the
government or political personalities and the board members for making several strategic
decisions.

2AGENCY THEORY
Reference
Namazi, M. (2013). Role of the agency theory in implementing management's control.
Journal of Accounting and taxation, 5(2), 38.
Shi, W., Connelly, B. L., & Hoskisson, R. E. (2017). External corporate governance and
financial fraud: Cognitive evaluation theory insights on agency theory prescriptions.
Strategic Management Journal, 38(6), 1268-1286.