Agency Cost

• Agency costs are economic concepts regarding owner costs

(principals) whether organizations, individuals or groups of people,
compilation of owners (principals) choosing or buying an "agent" to
move on behalf of. Both parties have different interests and the agent
has more information, so the owner (the principal) cannot directly
carry out the installation of the right agent for the best interests of
the owner (the principal).
Example Agency Cost
• Costs borne by the shareholders of the owner (principal), when the
company management (agent) buys another company to expand its
power, or spends money on projects that are preferred rather than
maximizing the value of the company.
Type of Agency Cost
Michael J and William M (1976) said there are at least 3 types of agency
costs, namely:

a. Costs incurred to oversee managerial activities, for example audit fees.

b. Costs incurred to limit undesirable management actions. For example

appointing members from outside for the board of directors or management
hierarchy.

c. Opportunity costs when the shareholder vote is limited.

Jensen and Meckling [1976] divide the type of
agency costs into 3 types namely:
a. Monitoring cost. Costs arising from monitoring, measuring,
observing and controlling agent behavior.

b. Bonding costs. The costs are actually borne by management (agents)

to be able to comply and establish mechanisms that want to show that
the agent has behaved in accordance with the interests of the principal.

c. Residual loss. Costs in the form of decreased principal welfare as a

result of differences in agent decisions and principal decisions.
 Agency Cost Source
Agency costs have two main sources, namely:

a. Costs are inherently related to the use of agents (for example, the
risk that agents will use organizational resources for their own benefit).

b. Engineering costs are used to reduce problems associated with

agents using further information about what agents do (for example,
financial statements of production costs) or using mechanisms to align
the interests of agents with principals (eg executive compensation with
equity payments such as stock options) .
Tips for Getting Agency Costs Well

a. The alignment of vision between the company's central management

and the agency.

b. The existence of financial recording and reporting that is

transparent, valid, realtime and can be accessed by several parties at
once, making it easier to find out the company's financial position in
the context of making agency cost decisions appropriately.