Agency cost
Agency costs are the economic costs associated with a principal delegating decisions to an agent whose interests or information may differ. They can include monitoring expenditure, costs of assurances or commitments made by the agent, and residual losses from decisions that still diverge from the principal’s interests. Controls and incentives may reduce some conflicts while creating new costs or behavioural effects. Assess their net benefit rather than assuming all managerial pay is an agency cost or that monitoring can eliminate every conflict.
Worked example
Shareholders fund independent oversight of management reports. This monitoring costs money but may reduce concealed poor decisions. A bonus tied only to current profit could create further costs if managers postpone valuable maintenance to meet the target.
Common mistake
Treating any cost of employing a manager as the whole agency-cost concept or assuming a performance bonus guarantees aligned behaviour.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | SBL | Direct | September 2026–June 2027 |