Theories Of Agency Theory

There are many theories which can be applied to organisations to support growth and sustainable performance, for example, agency theory. According to SevenPillars Institute (No date), agency theory describes how to organise the relationships in which one party decides and determines the works while another party have to give effort to do the works. Normally, in an organisation, those parties are principals which are the shareholders and the agents which are managers. In this relationship, the principals hire one or more managers to perform works. Agency theory assumes that both the parties are motivated by self-interest. However, based on Darsh (2011), this agency theory will mostly leads to some problems in the organisation. For example,

According to Margaritis (2010), the managers who are hired to operate the organisation have to be monitored to ensure they are prevented from deviation. Sometimes, the shareholders have to look at their activities therefore they can stop any improper decisions before they become worse. Thus, governance which normally exercised by the board of directors have to be applied in the organisation. The board members will control executives according to the rules and regulations of the organisation. They usually are also the firm executives as well. With the expectation of increasing the effectiveness of supervisory, outside directors and representatives of large shareholders will also nominated for board of directors. It is the same in Haagen Dazs Company, outside directors’ duties are unavoidable in order to improve the monitor role of the board of director and to separate the power of executives and the board members. The outside directors will carry out their jobs to maintain their reputations at first. Then, the organisation will start providing and offering stock-based incentive compensation to attract capable directors. Based on study carried out by Linn and Park’s (2005), it was found that the compensation plans for directors work well in reducing agency

After the managers finish deciding the objectives, they can then proceed to work with their employees to set their goals. The managers should discuss with their employees about the goals that the employees believe and willing to accomplish. They should also consider the period of time to achieve the goal and the resources needed. Based on iEduNote (No date), continuous monitoring performance and progress is the third step of management by objectives. In this step, the managers and the employees have to identify the ineffective programs by comparing the performance of the pre-established goals. They have to also prepare long and short term plans so that the plans are well arranged and easier to achieve. They also need to design an integrity organisational structure with clear responsibilities and decision-making authority. Next, performance evaluation have to be perform after the programs or the plans are done. The managers who are participated in that programs need to give review in this step. Finally, the last step of management by objectives is providing feedback and rewarding achievements. Feedback is essential for the managers and also the employees as it allows individuals to monitor and correct their own actions so that they can perform better in the next program. Lastly, the employees who are doing well will be rewarded for their