Agency theory
Agency theory examines a relationship in which a principal delegates decisions or work to an agent whose interests and information may differ. Contracts, incentives, monitoring and governance seek to reduce harmful conflicts, but each creates costs and imperfect measures can produce new distortions. The relationship is broader than owners and directors, and not every disagreement is misconduct. Consider risk preferences, information asymmetry and the behaviour induced by the proposed control.
Worked example
Owners want sustainable value, while a manager’s annual profit bonus may encourage cutting maintenance. A longer-horizon balanced reward and suitable oversight can improve alignment.
Common mistake
Giving an agent a numerical target does not automatically solve the conflict if the target omits important outcomes or can be gamed.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | APM | Supporting | September 2026–June 2027 |
| ACCA | BT | Direct | September 2026–June 2027 |
| ACCA | SBL | Direct | September 2026–June 2027 |
| FIA | FBT | Direct | September 2026–June 2027 |
