What is "Agency Theory"?

 

Theory explaining the relationship between principals, such as a shareholders, and agents, such as a company's executives. In this relationship the principal delegates or hires an agent to perform work. The theory attempts to deal with two specific problems: first, that the goals of the principal and agent are not in conflict (agency problem), and second, that the principal and agent reconcile different tolerances for risk. 

 

A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving problems that can exist in agency relationships; that is, between principals (such as shareholders) and agents of the principals (for example, company executives). The two problems that agency theory addresses are:1.) the problems that arise when the desires or goals of the principal and agent are in conflict, and the principal is unable to verify (because it difficult and/or expensive to do so) what the agent is actually doing; and2.) the problems that arise when the principal and agent have different attitudes towards risk. Because of different risk tolerances, the principal and agent may each be inclined to take different actions.

According to "Agency Theory":

- Organization Owners are "Principal"

- Employees are the "Agents of the Principals"

- "Agents" may not have their goals inline with the goals of the Organization/ Principals

- "Principals" need to adopt measures to keep the goals and performance of the "Agents" inline with that of the Organization

I agree With Mr, Hafiz Amjad Mehmood Answer .

Agree with Hafiz.................................

Agency Theory explains how to best organize relationships in which one party determines the work while another party does the work.  In this relationship, the principal hires an agent to do the work, or to perform a task the principal is unable or unwilling to do. 

Agency theory this is a framework from within the frameworks that can be studying accounting problem, both academic and the agency theory general sense on the basis of a relationship between two or more parties which are authentic and the agent is based on a set of assumptions which are as follows:1. The economic consciousness for two parties relationship.2. The difference in both authentic and agent preferences.3. can motivate the agent to bear the responsibility and the performance of his duties. It has its problems and constraints, costs and its applications in the field of cost accounting and accounting and management and preparing budgets.