Agency and Corporate Governance

Abstract

Agency theory attempts to provide a mechanism for exploring the relationship between the owners of a business (the shareholders) and those who control them (the directors). Most large companies, particularly those quoted on stock exchanges, are not managed by the shareholders (the principals); rather they are run on behalf of the principals by a board of directors (the agents). Although directors are employed to act in the best interests of the owners whose interests they represent, in reality directors are typically rational individuals who maximize their own returns – it is after all human nature to act in one’s own self interest. Agency theory views the business as a combination of thousands of contracts which bus ..