N In this assignment we are going to discuss what is meant by agency theory, the agency relationship, and problems of agency theory together with their solutions as well as the assumptions. An agency is characterised as a relationship between two gatherings, one referred to as the main the other known as an operator, whereby an executor speaks to the primary to participate in a transaction with an outsider. An agency relationship gets to be successful once the vital delegates or contract the executor to render an administration for the benefit of the principal. Agency theory explains how to best organise relationships in which one gathering decides the work while another does the work. Agency theory is developed as a framework for analysing
Finally an empirical review was conducted by referring to various countries where the government agencies operates. The combination of such reviews gave rise to the conceptual frame work that acted as a GPS for the study. 2.2 Concepts and terms As the name suggests, Executive Agencies ought to be only implementing or performance agents of the Government; this is because agency is a relationship in which one party (the principal) delegates work to another (the agent) who performs that work (Eisenhardt, 1989). In agency, two parties are involved; the agent and the Principal. The law defines the two terms by stating that “an agent is a person employed to do any act for another or to represent another person in dealings with third person and a person for whom such act is done or who is so represented is called the principal” (Law of Contract Act (R.E.
2.3. Agency Theory Agency Theory (AT) is often applied in order to explain certain phenomena in the context of franchising (e.g. Brickley and Dark, 1987; Carney and Gedajlovic, 1991; Doherty and Quinn, 1999). This section therefore deals with some aspects of AT such as the principal-agent model, AT’s application in franchising, agency problems and costs, and it lists measures to remedy those issues. 2.3.1.
He had to deliver the merchandise to the particular customer for the principal. The employee was responsible for promoting their actions with the client, by helping to get the goods inside of the store that caused the old break. In addition, the actions of the agent out of his employment created a relationship between the agent and the client, therefore, not involving the
Accountability and obligation, responsibility to someone else for something—these are the dual dimensions of objective administrative responsibility” (Terry, 2012, p. 84). Principal-agent theory is used in this case “to determine the objective responsibility in terms of relationships between those with the primary right to exercise authority (principals) and those charged with carrying out their wishes (agents)” (Terry, 2012, p. 84). Sappington (1991) identifies the central concern of this perspective as “how the principal can best motivate the agent to perform as the principal would prefer, taking into account the difficulties in monitoring the agent's activities” (Terry, 2012, p.
Likewise, where the costs of what an agent is doing can be costly for the principle, these cases are indicated as Moral Hazard and Conflict of Interest. Moreover, there is another kind of agency problem; this problem involves the presence of big stockholders and small stockholders. When shares are given out to the stockholders, a behavioral act between the big stockholder and the small stockholder takes place meaning that the actions of the small stockholders are impacted by the big stockholders decisions, therefore the big stockholder invades on the interest by dividend
Agency theory suggests that the interest of the business should come before self-interest. This may imply maximisation of profit, growth and shareholder return. Some writers such as Herbert Simon have argued that directors are more likely to act as ‘satisfiers’ than maximisers since corporations as organisations don’t act to achieve the best possible results but merely to achieve satisfactory results across several objectives. Simple agency theory aims to explore the corporate governance issues involved in the shareholder and director relationship as principal and agent. Whereas shareholders represent the owners of the business, the executive directors/directors look after the running of the business for them.
- Theoretical Framework The theoretical framework of this study is premised on the agency theory (AGT) propounded by Jensen and Meckling (1976). AGT emphasizes the agency problems arising from the separation of ownership and control. AGTemphasized the connection between providers of corporate finances and those entrusted to manage the affairs of the firm. According to Jensen and Meckling (1976), agency relationship in terms of “a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf which involves the delegation and concentration of control on the board of directors (agent)” (as cited in Lanis & Richardson, 2011). Furthermore, AGT explained the variations in decisions;
Ng and Luciametti (2015) conducted a study on I-Deals (i.e. “A non-standard, personalized work arrangement negotiated between an individual and his/her employer” Rousseau 2005). This study adds up to the literature by suggesting that the motivational goals are linked with job behavior by the mediating impact of one’s perception about the I-deals received. I-deals may contain job conditions or arrangements decided among worker and employer. Few other studies also supported this concept like Ng and Feldman (2010, 2012) suggested that one’s expectation about idiosyncratic arrangements effects his/her commitment to the organization.
Agency theory posits that agents have more information than principals and that this information asymmetry adversely affects the principals’ ability to monitor whether or not their interests are being properly served by agents. Furthermore, an assumption of agency theory is that principals and agents act rationally and use contracting to maximize their wealth. A consequence of this assumption may be the ‘moral hazard’ problem (Jensen & Meckling, 1976), indicating that in an effort to maximize their own wealth, agents may face the dilemma of acting against the interests of their principals. This Theory will guide this study because studies have shown that effective internal control reduces agency costs (Abdel-khalik 1993; Barefield et al., 1993) and again, due to the fact that Internal control is one of the many mechanisms used in business to address the agency problem (Jensen and Payne