Examine Agency Relationship and the Cost of Agency (Essay Sample)

Agency relationship
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Institution of affiliation
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An agency relationship is an agreement where one part is appointed legally to act on behalf of another. In this case, therefore, there should not be any conflict of interest because what one party says is what the other wants. It means that the relationship between the two sides involves a certain level of trust. The appointed agent is expected to act in the best interest of the principle which therefore means that the relationship gives the agent the permission to work as if the principle was the one who was doing the action. For the relationship to exist, then there should be a written or oral agreement between the two parties CITATION Sar01 \l 1033 (Sarkar, 2001). At times, there exists a dilemma because the agent may opt at their own to act in their interest which should never happen. This relationship is usually very common in political science and economics but can also be applied in other various areas.
Agency cost, on the other hand, is the amount of money that should be paid to the agent who is working on behalf of the agent. They can arise due to the problems that come along with the relationship as the agent opting to act on their interest or conflicts of interest between the management and the shareholder CITATION htt4 \l 1033 (htt4). It is also possible for the management to have the aim of growing the company in a manner that will result into maximization of their personal power and wealth which may not be the same thing that the shareholders have in mind. Agency costs are in some way inevitable because when the principals are not entirely in charge the expenses may be used to provide the appropriate material incentives and also most importantly moral incentives for agents that will encourage them to continue to perform their duties to the best possible way that is good because there will be no conflict of interest.
Remuneration is the payment that is made to a person for their services. Despite the salary that is given to the people, they can also get bonuses and other benefits that an employee is expected to get from their employer. Through management remuneration the agency costs can be reduced because a plan can be made between the two parties where they agree on a certain fee that will be paid and the bonuses that the agent will be able to get, and this will be cheaper on the long run...