ACCA AFM Syllabus A. Role Of The Senior Financial Adviser - Agency Relationship - Notes ^{3 / 6}

Agency is defined in relation to a principal. What?! Well all this means is an owner (principal) lets somebody run her business (manager).

The agent is doing this job on behalf of someone else.

Footballers, film stars etc all have agents. They work on behalf of the star. The star hopes that the agent is working in their best interest and not just for their own commission…

Principals and Agents

A principal appoints an agent to act on his or her behalf.

In the case of corporate governance, the Principal is a Shareholder and the Agents are the Directors.

The directors are accountable to the principals

Examples of Agents:

1. The Chief Executive (CEO)

2. Non-executive directors (NEDs)

3. The Chairman

Agency Costs

• A cost to the shareholder through having to monitor the directors

• Over and above normal analysis costs

• A result of comprised trust in directors

Agency Problem

Agency problem is the risk that the directors will run the company in their own interests, rather than those of the shareholders and the other stakeholders. 

For e.g. concealing losses from shareholders in order to receive a bonus