Agency theory

Agency theory, is the name by which the business technique is known in which a company or person uses another to do a job for him. In this way, the agent is authorized by the principal to carry out contracts and other actions on behalf of the principal.

To better understand it, this is a business measure with completely legal effects, many times it leads to separate the ownership of the company into several parts, since despite the fact that it is the agent that executes, actions or any type of management, everything will have the same validity as if it were the main one who carried it out.

Origin of agency theory

It is in the 70s when one begins to hear about this concept who ensures that each of The subjects of an agency relationship have their own interests and both try to maximize the utility.

Functions of the agency treaty

As you may have noticed in daily life, this agency theory is present in many companies, with this This concept seeks to build a broad system that allows many possibilities regarding the way in which the business.

The different working conditions that are agreed between the principal and the agent are carried out under specific contractual conditions as a form of compensation. In these commercial type agreements, it is worth noting that each of the parties seeks their own interest and maximum profits for themselves.

Many times companies turn to managers who do not participate in the ownership of the company, these subcontracting are carried out in function of improving the results that could be achieved by directly carrying out any specific activity related to the production.

Disadvantages of the agency treaty

• One of its main disadvantages is related to the cost derived from the same agreements regarding compensation to the person or company that has been hired.
• Business judgment can be compromised, generating the well-known agency problems.
• It is worth noting that not complying with the agreements and objectives could result in the application of fines.

Costs of Agency Theory

In this relationship created, some analysts have determined some costs that derive from it, which are:

Cost of productive control

Here are the different costs to be used by the principal, in this case the company based on regulating the agent

Residual losses

We already mentioned this disadvantage in a general way, when referring to the differences of criteria that may arise between the agent and the main one. it can devalue the decision-making power since the principal would have handled a certain situation differently from how the agent could handle it.

Extra costs or deposit

They are those extra costs to maintain fidelity and the standard levels of the principal, to leave these standards, Failure to comply with the way in which any action is taken, according to the contract that has been made, it will surely penalty fee.

How to counter these costs and the various problems

The solutions given can be many, although many times making a decision that can truly solve any of these problems can be another story. To start the company or principal, you must control or implement control systems with which you can monitor the way in which your agents behave.

This occurs many times framed in the figure of audits, which can be carried out by an external agent who reports a technical report to the company or principal. This can allow the principal an unbiased view of the big picture.

Tackling these issues may not be easy or have light solutions other than audits, concessions, or Incentives, an effort is necessary that favors efficient communication and control mechanisms suitable.