The Agency Theory: The Agency Theory

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The agency theory describes the relation between two parties, principals and agents (Jensen & William, 1976). Principals are recognized as Shareholders while Agents as company’s executives. The agency theory also discusses how to organize this relation between these two parties in a decent approach so one of them determines the work while the other party does the work (Jensen & William, 1976). It is known also that the principal hires an agent to do the work. For example, in companies, the principals are the shareholders of the company, delegating to the agent (CEO), to accomplish tasks on their behalf. In addition, according to the agency theory both principals and agents are motivated by self-interest (Hill & Jones, 1992). Thus, agents will follow their own aims and purposes which will create conflict with the goals and objectives of the principals. Agency theory is also called the principal agent theory. It discusses the separation that exists in companies between the executives (the principals) and the agents (the managers). It can be also linked to the idea of employment relationship which may be perceived as an agreement between these two parties. Thus, the payment feature which is part of this contract is used as motivator to the agents in order to perform duties in a way to satisfy their employers (Bebchuk & Fried, 2003). However, agency problems are the result of a separation of ownership and control, and insufficient incentives for monitoring, a necessary

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