Disadvantages Of Agency Theory

Ross states that the agency principle relationship is one of the most longstanding and generally codified forms of social interaction, and defies this the agency principle relationship as a legal relationship which has arisen between two or more parties, a designated agent on one side that acts for and on behalf of the principal, and the principle on the other side who authorizes the designated agent . Assuming both parties are tend to maximize their utilities, there would be potential that the agent will not always act in line with the best interests of the principal . Agency theory and agency problems, which are noticeably a part of mainstream economics, point out latent problems and conflicts which may arise when two (or more) parties engaged

discuss that the managers can progress further and they can enter into transactions in with other parties who are directly or indirectly controlling by them under arm’s length basis or transfer pricing .Although it would not be easy to distinct into one type, the examples can be expanded through various scenarios and assumptions on each type of the three reasons where the shareholders’ and the managers’ interests are conflicting.

2. Conflict between the majority and minority shareholders

The second type of agency problem occurs between the controlling (majority) shareholders, as the agents, and noncontrolling (minority) shareholders as the principle .

LaPorta et al. argues that particularly, wealthy common law countries have more effective protection mehanisms to the minority shareholders whereas civil law countries have a weaker approach and, this can shed a light why corporations are owned and financed in a very variable manner . Their study exposes that weaker shareholder protection causes a concentrated ownership . It is an unexceptional that institutional or individual investors are more likely to purchase and hold minority shareholding positions where legal protection is broader and duly enforced

Strategies for reducing agency costs

Minimizing the agency costs would be the best interest of any corporate actors. However, the crucial point to the mitigate impacts of the agency problem is recognition of the parties that the relationship bear agency costs .

Legal strategies for controlling agency costs can be split into two categories as “regulatory strategies” and “governance strategies” where the regulatory strategies are dictative in nature and yet, governance strategies are intended to protect the principal’s interest by controlling actions of the agencts . For ease of reference Armour et al. demonstrate the regulatory strategies and governance strategies as follows :

Table 1: Strategies for protecting princples

Regulatory Strategies Governance Strategies Agent Constraints Affiliation Terms Appointment Rights Decision Rights Agent