Agency Theory and Relationships for Governance Risk and Ethics

An agency relationship exists where a principal (the owner) or an organisation engages an agent (the manager) to perform duties on the principal’s behalf. For example, the shareholders delegate the running of a business to the directors. Here’s a quick overview if you’re studying Governance Risk and Ethics.

The directors (agents) should manage the business and satisfy the needs of the shareholders (principals), who are the owners of the business.

Agency Theory

Agency Theory, according to Berle and Means (The Modern Corporation and Private Property) is:

  • separation of ownership and control
  • division of authority and responsibility
  • agents are accountable towards their principal

The principals, can’t manage the businesss by themselves, so must rely on agents.

Fiduciary Duty

As agents, directors have a fiduciary duty towards the principals of the organisation. They have a responsibilty to:

  • Avoid conflicts of duty
  • Act honestly and in good faith
  • Use their power appropriately