Agency Theory

Agency Theory

The foundation of human and organizational behavior depends logically upon a model of man. One model that is intuitively appealing is the resourceful, evaluating, maximizing man (REMM) which posits that any individual reasons about his environment and that he maximizes, or acts in his own self-interests within certain parameters (Meckling 1976). Agency theory is founded on this basic premise - that economic actors are utility maximizers and will strive to obtain what is in their best interest, which may or may not coincide with the best interests of the organization and its stated mission (Jensen and Meckling, 1976; Eisenhardt 1989).

The vast majority of research on agency theory concerns relationships in the corporate arena. Stockholders represent the principal who contracts with the agent, management, to act in the interests of the stockholders (owners). In a perfect world, the principal is able to monitor the agent to ensure the agent is acting in accord with the principal's objectives. However, if information asymmetry exists, the principal may not be able to sufficiently monitor the agent who then may be motivated to act in his self-interests in accordance with a REMM model (Meckling 1976).

Jensen M. C. and W. H. Meckling (1976) Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics Vol. 3, No. 4. 305-360.

Meckling W.H. (1976) Values and the Choice of the Inidvidual in the Social Sciences. Schweizerische Zeitschrift fur Volkswirtschaft und Statiskik Dec 1976, pp 544-560.

Eisenhardt K. M. (1989) Agency Theory: An Assessment and Review. Academy of Management Review. vol 14, no 1 57-74.