Agency Theory

Agency theory describes the problems that occur when one party represents another in
business but holds different views on key business issues or different interests from the
principal. The agent, acting on behalf of another party, may disagree about the best course of
action and allow personal beliefs to influence the outcome of a transaction.
The agent may also choose to act in self-interest instead of the principal's interests. This may
result in conflict between the two parties and might be an agency problem. Agency theory
tends to focus mainly on the interest of shareholders.
Stakeholder Theory
Stakeholder theory describes the composition of organizations as a collection of various
individual groups with different interests. These interests, taken together, represent the will of
the organization. As much as possible, business decisions should consider the interests of this
collective group and advance overall cooperation.
Conflict represents an erosion of these interests. Bringing these distinct groups together to
reach an agreement may not always be possible, so business decisions must consider each
point of view and optimize the decision-making to include all voices.
Key Differences
With agency theory, there are differences in what the principal and the agent think is the best
course of action, also known as the principal-agent problem. The agent theory can arise in
such cases as portfolio managers—the agents—managing assets on behalf of an individual or
company—the principal. Agency loss comes about when the principal suggests a loss
happened due to an agent’s actions that were not in the best interest of the principal.
With stakeholder theory, there’s a difference in the priorities for stakeholders, either internal
or external. Internal stakeholders can include employees, investors or owners. External
stakeholders include those that are affected by a company’s decisions, such as suppliers
or creditors.
An example would include a conflict between company management and shareholders. The
management may make decisions that do not necessarily enhance shareholder value, which
conflicts with shareholder interests. Performance-based compensation, which ties
management incentives to shareholder value, is one way that companies look to address the
stakeholder theory. However, this does come without its own issues, which includes trying to
boost short-term performance at the sacrifice of long-term growth.
The agency theory looks to outline the interests of a principal and an agent, which can
include an individual and a financial planner.
Agency theory primarily focuses on the interest of the shareholder(s), while principal theory
includes the entire range of stakeholders.
The stakeholder theory suggests there are differences between individual groups within an
organization, such as the employees, investors, and suppliers.