Agency Theory
Agent is the Management (Board of Directors) appointed for the best interest of the stakeholders (shareholders, banks, community, etc.).
Previously my friend answered very well. So, I will just add on a little extra as an example.
1. Shareholders Invest Money to Maximize their Wealth (Dividend or Capital Gain)
2. Agents may be risk averse (Unwilling to take risks) and therefore do not invest in profitable projects because they are risky. So, the shareholders are derived from the dividends (that they are supposed to get periodically) or the increased Share price (capital gain/selling the shares in the market).
3. Another scenario could be that the shareholders hold shares of many companies and they want stable yet risk adverse income whereas Management/Board of Directors (Agent) want to increase their incentives by investing in risky projects that may deteriorate the company position.
4. Therefore, Agency Conflict has been a big issue over the years. The conflicting choices of money suppliers (Shareholders for say) and the utilizers of the funds (The Management).
5. Agency Cost is another factor where directors are paid for their service. If they do not add value to the organization, it would not be in the best interest of the shareholders. Agency cost is incurred thereof.
Objective would be to keep the shareholders' expectation as the utmost priority whilst protecting the investments of the company in the long run. During AGM, Shareholders vote, choose the auditor for the forthcoming year, join open floor question and answers about the prospects of the company. The objective is to formulate strategies so that the funds provided by the shareholders and others are managed efficiently and effectively by the Agents/Board of Directors/The Management.
Hope this helps a little.
Arunav
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