Agency theory Sample Clauses
The 'Agency theory' clause defines the relationship between a principal (such as a company or individual) and an agent who is authorized to act on the principal's behalf. In practice, this clause outlines the agent's powers, duties, and limitations, often specifying the scope of authority and the obligations to act in the principal's best interests. By establishing clear guidelines for the agent's conduct and responsibilities, the clause helps prevent conflicts of interest and ensures that the agent's actions align with the principal's objectives, thereby reducing the risk of misunderstandings or misuse of authority.
Agency theory. In addition to the resource scarcity view, dynamics of franchised outlets has been examined from an agency-theoretic perspective as well. Many franchisor- franchisee relationships can be characterised as agency relationships. Such relationships tend to be maintained as long as each partner‟s benefits exceed its costs. Agency theory can be defined as “an agency relationship exists in any joint effort in which one party (the principal) delegates the authority to as a second (agent)‖ (▇▇▇▇▇▇▇, 2007, p908). From the perspective of agency theory, the franchise agreement is designed to maximize the relational qualities of exchange, and the contract clauses are the means to ensure unity (▇▇▇▇▇▇▇▇▇ and ▇▇▇▇▇, 1999). In franchising relations, franchisors act as principals, giving some resources and authority to franchisees (▇▇▇▇▇▇▇, 2007). (Croonen, 2007, p18) ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇▇ (1991) point out the following agency problems in franchise relationships: inefficient investment, free-riding and quasi-rent appropriation. Inefficient investment results from the fact that franchisees have a large proportion of their wealth tied up in one or a few units, and therefore have to consider the full risks of each marginal investment they make. According to ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇▇ (1991) the problem of free-riding refers to the situation where the franchisee tries to cut costs by offering a lower quality than specified by the franchisor. In these cases, the franchisee benefits from the system‟s well-known brand name, but at lower costs than the other franchisees. As a result, the franchisee‟s lower quality offerings might damage the reputation of the franchise system. The free-rider problem is particularly common in franchises with few or no repeat customers (▇▇▇▇▇▇▇▇ et al., 1991). The third agency problem concerns the issue of quasi-rent appropriation. A quasi-rent exists if the value of an asset is higher in its current use than it is in alternative uses. Quasi-rents arise when partners make relation-specific investments (▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇▇▇, 1991). In agency theory, franchisors have two basic tools to ensure franchisee cooperation: direct observation of franchisee behaviour such as monitoring and incentives and motivation to franchisee outputs (▇▇▇▇▇▇▇▇▇▇▇▇▇▇ et al., 2006). ▇▇▇▇▇▇▇ (2005) stated that agency theory suggests that franchisors want to reduce their organizational costs – monitoring costs in particular – by rewarding a franchisee‟s efficiency with profit. Moreo...
Agency theory. Next to the many publications concerning the agency problem, it is ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇ (1976) who was most quoted (▇▇▇▇▇, ▇▇▇▇▇▇▇▇, ▇▇▇▇▇, & ▇▇▇▇▇▇▇▇, 2019). They developed the agency theory, discussing problems within companies due to the separation between owners and managers as well as possible ways to solve or minimize such problems (Saraykina, 2019). An organization is regarded as a junction of contracts between individuals and groups, such as managers, shareholders, suppliers, customers, employees and so on, working together in the company (Deloof, Manigart, Ooghe, & ▇▇▇ ▇▇▇▇▇, 2019). All these different stakeholders pursue their own objectives and can potentially conflict with each other. These conflicting interests are balanced through agency relationships, which are relationships between individuals based on a contract where one person (the principal) delegates authority to another person (the agent) to act on his behalf (▇. ▇▇▇▇▇ & ▇▇▇▇▇, 2018; ▇▇▇▇▇▇ et al., 2019). Such agency relationships occur in companies where share ownership and management are separated. The shareholders of the company (principal) delegate a certain decision-making power to the managers (agent), who lead the daily management. This kind of relationship creates numerous agency problems caused by the fact that shareholders have different objectives compared to managers and vice versa. For example, a manager may decide, in his or her own interest, to take a high risk on investments as they are rewarded for good results, but do not suffer a loss in case of bad results (▇▇▇▇▇▇ et al., 2019). ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇ (1976) proposed two ways for shareholders to ensure managers make decisions that maximize the value of their shares. First, the objectives of both parties can be aligned as much as possible by providing appropriate incentives, such as stock options for management. Secondly, a monitoring system can be built up, such as regular auditing of the financial accounts (Deloof et al., 2019). Conflicts of interest between shareholders and managers may also arise due to information asymmetry. Voluntary reporting and disclosure of (non-)financial information can limit this asymmetry and thus avoid or reduce agency problems (Jensen & Meckling, 1976). The above argues the importance of agency theory for this master’s dissertation. In addition, it is directly linked to the stakeholder theory.
Agency theory. The agency theory is concerned with the analysis of the relationship between company owners, the principal, and the person that manages the firm, the agent. It offers an understanding between financiers and existing shareholders’ relations, which is important when the financiers are venture capitalists or equity operators, seeing as they then may also take a position as shareholders and managers. This theory is not only applied in the field of corporate finance but also in marketing, organizational theory and accounting (▇▇▇▇▇▇▇ & ▇▇▇▇▇, 2021). When this theory was initially proposed, the agency relationship had been defined in the following manner: “A contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent.” If both sides want to maximize utility, there is an indication that agents will not always act in favor of the principals (▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, 1976). This can happen when a manager uses their control rights to seek projects that benefit him rather than the investor (▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇, 1997). Shareholders’ interests can thus be put aside when a manager maximizes his self-interest, which can be at the expense of a company’s profitability (▇▇▇▇ & ▇▇▇▇▇▇▇▇▇, 1998). This divergence cannot be eliminated but it can be limited through the incurrence of monitoring costs and the application of fitting incentives. The expenditure of bonding costs can also help to limit the discrepancy, this means paying the agent to use up resources. These expenditures will help to prevent the agent from taking harmful decisions for the principal or at least compensates the principal. Agency costs thus exist out of these monitoring costs by the principal, bonding expenditures by the agent and residual loss, which refers to reduced welfare that is experienced by the principal because of these divergences (▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, 1976). In the field of corporate finance, this theory is an explanation of numerous agents’ behavior that intervene in a company’s financing mix and it analyzes the impact of this behavior on the financial structure. The agency theory implies that the optimal capital structure arises from a compromise between the different funding sources that makes a settlement of conflicts of interest between shareholders and creditors on the one hand and managers on the other possible. When agency costs are brought to a minimum, ...
Agency theory. According to ▇▇▇▇▇▇▇▇▇▇ (1989), the agency theory reflects the basic agency structure of two parties, the principal and the agent. The agent executes the work, imposed by the principal. Agents are considered to be opportunists. Problems arise when the desires of the principal do not align with those of the agent, thus when the agent takes decisions that are especially interesting for themselves and not for the principals. Another problem occurs when it is difficult for the principal to control what the agent is actually doing, in other words, to verify whether he is behaving properly. Another conflict can appear when the principal and agent have different attitudes towards risk. ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇ (1976), Dallas (1996) and ▇▇▇▇▇▇ & Fama (1983) assert that agency costs consist of: - Monitoring expenditures by the principal: cost incurred by the agent to control the decision- making process of the agent - Bonding expenditures by the agent: costs incurred by the agent to convince the principal of his loyalty - Residual loss: costs incurred by the principal because the above costs were not sufficient to counter the decisions that are contrary to the principal's interests. The role of the board of directors is to reduce the conflicts of interest between shareholders (principal) and management (agent). They also try to diminish agency costs by separating decision management and decision control (▇▇▇▇▇▇▇▇▇▇, 1989; ▇▇▇▇ & ▇▇▇▇▇▇, 1983; ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, 1976). To accomplish this, the board should include several of the organization’s top executives. The board collects relevant information through them about the decision initiatives. Information is also acquired through low level managers. All this information is used to set the rewards of the top managers (Fama & ▇▇▇▇▇▇, 1983). When boards dispose of enough appropriate information, compensation is less likely to be based on firm performance. Alternatively, compensation will be based on knowledge of executive behaviours. As a result, managers will take well thought-out actions and they will make more decisions in line with stockholder’s expectations (▇▇▇▇▇▇▇▇▇▇, 1989). in agency theory, rewards are extrinsic and not intrinsic. These rewards include tangible, exchangeable commodities that can be clearly measured (▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇, & ▇▇▇▇▇▇▇▇▇, 1997). The split-up of top-level decision management and control can only be successful if outside directors are motivated to execute their responsibilities without colludin...
Agency theory. This paper uses agency theory as an analytical lens to identify the symptoms of contracts. Blockchain presents an alternative remedy to the symptom that has blighted the world economy. The relationship investigated in agency theory is one of the most commonly codified and oldest codes of social interaction. Agency theory revolves around the “principal-agent” relationship, where a “principal” hires an “agent” using a legal contract. As the “principal”, delegates work to another, the “agent” [▇▇▇▇▇▇▇▇▇▇, 1985], with the agent thereby acting on behalf of the principal in a particular decision problem domain [▇▇▇▇, 1973]. The essence of agency theory is the study of principal-agent relationships such as lawyer-client, buyer-supplier, and employer-employee, to name a few [▇▇▇▇▇▇ and ▇▇▇▇▇, 1978]. The principal-agent literature intends to construct a blueprint for an optimal contract between principal and agent. ▇▇▇▇▇▇▇▇▇▇ (1989) [▇▇▇▇▇▇▇▇▇▇, 1989] shows that the problem domain studied in the principal- agent relationship is where the principal and the agent have different preferences for what the goal of the relationship is, and how much risk they are willing to take. The agent is, for example, compensated if one party prefers to whistle- blow when there are illegal practices in the relationship. Therefore, agency theory assumes that the principal and agent have different goals, known as a “goal-conflict”. Another aspect of the principal-agent relationship, “moral hazard”, is de- fined as the case where an agent neglects contractual responsibilities. For ex- ample, moral hazard occurs if an employee uses company time to work on a personal project. The employee’s tasks could be so complex that management fails to detect that what the employee is doing on company time. The employee (agent) violates the interests of the management (principal), and moral hazard occurs [▇▇▇▇▇▇▇▇▇▇, 1989, Holstrm, 1979]. Another critical assumption in agency theory is known as information asym- metry, which emerges from the fact that a principal cannot monitor competen- cies and map out the agents’ intentions beforehand. It also arises when knowl- edge of an agent’s behavior is unclear and not deemed trustworthy. ▇▇▇▇▇▇▇▇▇▇ (1989) [▇▇▇▇▇▇▇▇▇▇, 1989] notes that agency theory regards information as a commodity: Information has a cost and can be purchased, and organizations can invest in information systems to control opportunistic behavior from the agent. As scholars such as ▇▇▇▇▇▇ and...
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Agency theory. An assessment and review. The Academy of Management Review, 14(1), 1989.
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