Agency Theory and Its implication on

corporate Governance

- A contract under which one or more persons (shareholders) engage another

person/s (directors) to act on their behalf, delegating decision making authority

- If both parties are utility maximizers… agents will

tend to act in their own interests and not always
in the best interest of their principal.

Jensen and Meckling 1976

 Agency Theory and Its implication on
corporate Governance

-A agency problem is asymmetrical access to information

-Directors know far more about the corporate situation than the shareholders

- Indeed, shareholders have to rely on the directors to decide what information they should
have, over and above the minimum required by regulation and company law.

-Agency theory takes a view on the nature of man:

1.that people are self-interested not altruistic
2.that directors will act in their own interests not the best interests of their shareholders
3.essentially that people cannot be trusted
 Effect of Agency Theory/Contract of
Agency

- Whenever the owner of wealth (the principal) contracts with someone else (the agent) to
manage his affairs the agency dilemma arises

- Simple Agency contracts

-In a limited-liability company there may be many principals (shareholders) and their
agents (directors)

-Shareholders interests are seldom homogeneous

- Effect of growing listed companies

 Effect of Agency Theory/Contract of
Agency

- Strings of agency relations in Public companies

- An individual owner might invest his funds through a financial

adviser

- tracing the agency chain in such cases can be difficult

- Effect of growing listed companies

 Solution to Agency Problem

- Demands for reporting and transparency

- Requirements for accountability and audit

- Independent directors

- Separation of chairman and CEO

- Other regulations and legal requirements

- Corporate governance codes and principles

 Agency Problem at other companies

- not limited to relations between shareholders in listed

companies and their directors

- In private companies also

- Due to separation of members and the governing bodies

- What constitutes the governing bodies?

- Agency dilemma when there is delegation of

responsibility
 Corporate Governance Code (India)
- is an association of Indian businesses
- non-government, not-for-profit, industry-led and
industry-managed organization, playing a proactive role
in India's development process
- Founded in 1895, CII has over 7200 members, from the
private as well as public sectors, including SMEs and
MNCs, and an indirect membership of over 1,00,000
https://www.cii.in/membership_profile.aspx?
enc=PuO5CCh0+R5Vy5wBSXovVw==
- It has 64 offices, including 9 Centres of Excellence, in
India, and 7 overseas offices
- In 1996,CII took a special initiative on Corporate
Governance – the first institutional initiative in Indian
industry
 CII Roles
- Our primary goal is to develop Indian industry and to
ensure that government and society as a whole, understand
both the needs of industry and its contribution to the
nation's well being. For this, we work Our primary goal is to
develop Indian industry and to ensure
that government and society as a whole, understand both
the
needs of industry and its contribution to the nation's well
being.
For this, we work
• To identify and strengthen industry's role in the economic
development of the country
• To act as a catalyst in bringing about the growth and
development of Indian Industry
• To reinforce industry's commitment to society
 CII Roles
• To provide up-to-date information and data to industry
and
government
• To identify and strengthen industry's role in the
economic development of the country
• To act as a catalyst in bringing about the growth and
development of Indian Industry
• To reinforce industry's commitment to society
• To provide up-to-date information and data to industry
and government
 CII Roles
• To create awareness and support industry's efforts on
quality, environment, energy management, and consumer
protection
• To identify and address the special needs of the small
sector to make it more competitive
• To promote cooperation with counterpart organisations
• To work towards the globalisation of Indian industry and
integration into the world economy