The Agency Theory For The Best Interest Of The Shareholders

1234 Words5 Pages
The Agency Theory: This theory attributes the control for the best interest of the shareholders,it was introduced by Demsetz and Alchian (1972 )and was further improved by Meckling and Jensen ( Heslinda and Benedict,2009). The agency is a contract between the principal which are shareholders and the agent which are the managers . Most of the literature on corporate governance finds its roots in agency theory the relationships normally occurs when the principal hires the agent to perform a service on the principals ' behalf. the decision making authority is delegated by the principal to the agent.However the relationship between the principal and the agent can not be as simple and smooth as it appears (Theory of Mallin, 2010). Several…show more content…
As a consequence, monitoring every action from the managers is much expensive and does not contribute in maximising the shareholders wealth. Therefore, a more balanced approach should be used. The governance mechanism could be used by the shareholders instead of just monitoring the activities of the managers to motivate the managers that they act in the best interest of the shareholders.In fact, they should apply performance-based incentive plans based on compensating the managers’ performances on stock price changes. In addition, they can intervene directly as institutional investors in order to meet with the firm’s management and give recommendations concerning the actual operations, or sponsor a proposal for voting in the annual meetings. Another possible governance mechanism is to threat the managers through firing for poor performance or by a takeover, as poor performance companies have generally an undervalued stock, which attracts many companies for a hostile takeover, which means high chances of dismissal for the actual managers. However the business success and
Open Document