agency theory

Definition

A theory explaining the relationship between principals, such as a shareholders, and agents, such as a company's executives. In this relationship the principal delegates or hires an agent to perform work. The theory attempts to deal with two specific problems: first, that the goals of the principal and agent are not in conflict (agency problem), and second, that the principal and agent reconcile different tolerances for risk.

Use agency theory in a sentence

According to the agency theory, when there is a dispute between shareholders and the company's executives, the shareholders typically hire an agent to help resolve the problem.

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