Agency
Theory
1. Separation of Ownership &
Management
Under
agency theory management & ownership are two different aspect of organization.
Business is managed by manager hired by the owners. Manager acts on behalf of
the owner as agent.
2. Management act in Best interest
Under
agency theory, it is believed that manager will work in the best interest of
ownership. Therefore a formal hired by the owners to manage the business. It is
an ideal situation or case of agency theory.
3. Management Self Interest
Agency
theory recognizes the fact, that management may have their self interest like
increase in salary and bonuses. Therefore it is not practical that manager will
only focuses on the interest of owners.
4. Manager & Owner Conflict
Agency
theory recognizes that Manager Interest and owner interest conflict with each
other. Management may look into short term profit, while ownership is more
interested in long term growth. Manager is ready to take risky decision, while
owner would love to minimize the risk.
5. Manager Create Cost
Agency
theory explains that Management create number of costs for the ownership. For
example an increase in salary is cost for the ownership, as it will reduce the
ownership wealth. It is important to remember that any cost of expense is a hit
on ownership wealth.
6. Balance
Agency
theory explains a balance between management and ownership. Management should
look to ownership interest and ownership should also give due consideration to
self interest of management.
