Agency Theory

Group 5
Muhammad Ammar Bin Hamzah 1200683
Ahmad Al-amin Bin Mohd Azmi 1200698
Muhammad Haziq Mifzal Bin Mohd Madzlan 1200776
Ahamd Fitri Daniel Bin Kamal Jaffry 1200762
Ainur Ezaty Binti Ahmad Ronzee 1190691
Muhammad Nazirul Mubin Bin Shaiful Anuar
Muhammad Ikhmal Bin Rosli 1200687
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What Is Agency
Theory?
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 A theory known as agency theory
is used to explain and address
problems in the interaction
between company owners and
their agents.

The most typical arrangement for

such a relationship is between
shareholders acting as principals
and business executives acting
as agents.
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Key Takeaways
According to the definition of agency theory, this theory
centers on how agents and principals interact.

The board of directors and the CEO of a business are an

example of a principal-agent relationship, where the
board of directors is the principal and the CEO is the
agent.

It can be used to settle arguments between principals

and employees.
Theory of
principle
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 describes the pitfalls that
often arise when one
person or group, the
“agent,” is representing
another person or group,
known as the “principal.”

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 Principals delegate decision-
making authority to agents.
Because many decisions that
affect the principal financially are
made by the agent, differences of
opinion, and even differences in
priorities and interests, can arise.

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 TYPES OF AGENCY THEORY
RELATIONSHIP

Shareholders and Company

Executives
Board of Directors and CEO
Investor and Fund Manager

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 TYPES OF AGENCY THEORY RELATIONSHIP

1. Shareholders and Company Executives

In this relationship, the company executives serve as the agents and the
shareholders as the principal. Investors, in this case, are the shareholders
who fund the companies run by company executives.

2. Board of Directors and CEO

The CEO (agent) serves the board of directors (principal). The board of
directors would support the CEO if he can make profitable decisions.
 TYPES OF AGENCY THEORY RELATIONSHIP

3. Investor and Fund Manager

The fund manager is the agent, while the investor is the principal. The
investor gives the fund manager a fee, a percentage of the fund’s average
assets under management (AUM). In this scenario, the fund manager
allocates the money per the investor’s preferences.
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EXAMPLE OF
AGENCY THEORY
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Employees are agents, while employers are the
principals in agency theory. Employees are hired in a
company to work toward the organization’s goals.
However, the increasing number of corporate scams
affects employer and employee relationships.
Employees violate the organization’s ethics, which
results in significant financial and reputational damage.
Sometimes the damage done by corrupt employees is
irreversible, and an organization ultimately has to wind
up the business
 ADVANTAGES OF AGENCY THEORY

RESOLVING DISPUTE
AGENCY THEORY CAN RESOLVES THE DISPUTES BETWEEN THE
AGENTS AND THE PRINCIPALS AS THE PRINCIPAL IS A SUPERIOR
ENTITY COMPARE TO AGENT.

MOTIVATING AGENT
INTRODUCING BONUSES OR INCENTIVES IS A GOOD WAY TO
MOTIVATE AN AGENT AND WILL ALLOW THEM TO MAKE DECISIONS
WITH THE BEST INTENTIONS OF THE PRINCIPAL IN ORDER TO ACHIEVE
THEIR DESIRED INCENTIVE.
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 ADVANTAGES OF AGENCY THEORY

TRANSPARENCY
CONFLICT IS LESS LIKELY TO ARISE IF THERE IS TRANSPARENCY
BETWEEN THE PRINCIPALS AND THE AGENTS. ONCE TRANSPARENCY
IS PRESENT, CONFLICT IS REDUCED DUE TO THE FACT THAT THERE IS
LESS CONFUSION ON DECISION-MAKING.

PERFORMANCE-DRIVEN INCENTIVES
ANOTHER STRATEGY TO CUT AGENCY LOSS IS COMPENSATING
AGENTS ACCORDING TO PERFORMANCE. BETTER PERFORMANCE
MEANS BETTER BONUSES.

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 DISADVANTAGES OF AGENCY THEORY

AGENCY COSTS
AGENCY COSTS CAN REDUCE OVERALL PROFITABILITY, AS THE
PRINCIPAL MAY NEED TO INCUR EXPENSES TO ENSURE THAT THE
AGENT IS ACTING IN THEIR BEST INTEREST.

INFORMATION ASYMMETRY
INFORMATION ASYMMETRY CAN LEAD TO MORAL HAZARD, WHERE
AGENTS MAY ACT IN THEIR OWN INTERESTS AT THE EXPENSE OF
THE PRINCIPAL DUE TO HAVING MORE INFORMATION ABOUT THE
COMPANY

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 DISADVANTAGES OF AGENCY THEORY

DIFFICULTY IN MEASURING PERFORMANCE

DIFFICULTY IN MEASURING PERFORMANCE ACCURATELY CAN MAKE IT
CHALLENGING TO DETERMINE WHETHER THE AGENT IS ACTING IN THE
BEST INTEREST OF THE PRINCIPAL.

NEGLECT OF SOCIAL RESPONSIBILITY

NEGLECT OF SOCIAL RESPONSIBILITY MEANS THAT AGENTS MAY
PRIORITIZE PROFIT OVER SOCIAL AND ENVIRONMENTAL
RESPONSIBILITY, WHICH CAN HAVE NEGATIVE IMPACTS ON SOCIETY
AND THE ENVIRONMENT.
CONCLUSION
AGENCY THEORY EXAMINES THE DIFFICULTIES
AND POTENTIAL SOLUTIONS WHEN TASKS ARE
ASSIGNED TO AGENTS BY PRINCIPALS IN THE
CONTEXT OF COMPETING INTERESTS.

ACCORDING TO THE AGENCY THEORY,

SHAREHOLDERS ARE THE PRINCIPALS AND
MANAGERS ARE THE AGENTS.