In corporate governance, Agency Theory primarily addresses potential conflicts of interest between:
AShareholders (Principals) and Managers (Agents)
BEmployees and Direct Supervisors
CSuppliers and Customers
DGovernment Regulators and Board Members
Explanation
• Agency Theory, formulated by Jensen and Meckling, addresses goal divergence between business owners (principals) and executive managers (agents).
• Because self-interested managers may prioritize personal benefits over maximizing owner wealth, organizations incur ‘agency costs’ to monitor executive behavior.
• Alignment tools include performance-contingent stock options, independent board oversight, and executive equity ownership.
Exam Relevance
- Topic: Corporate Governance
- Subtopic: Agency Theory
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