It would help the CEO to remain in the position further. Positive- If the CEO manages to present a new sector for business to the board of directors, which can offer some sort of unique or unprecedented alternative, then the board of directors would support the CEO. Two types of findings along with consequences can be there, such as: The position of the CEO depends upon it too. Here, the CEO gets to decide the financial status of the board of directors.Д«ased on the decisions made by the CEO, this principal-agent relationship moves forward. In this relationship, the board of directors acts as the principal, and the CEO acts as the agent. There may raise some issues or conflicts between the principal and the agent. Negative- If the company executives cut down the price of the shareholdersвЂ™ stock, then the relationship between them would not be beneficial. A solid and beneficial connection would be built up for the future. Positive- On the contrary, if the company executives financially enhance the shareholdersвЂ™ stock, the relationship between them would be advantageous. There may be two results based on the type of decision. Hence, the responsibility of making proper decisions lies on the company executives. The effect that may fall on the investment depends upon the decisions made by the company executives. Here, the shareholders invest, and the investment is made to the businesses of company executives.

In this relationship, the shareholders happen to be the principal, and the company executives happen to be the agent. Agency theory is used for explaining and resolving all such agency problems. The agent acts as a representative of the principal in a specific business transaction who is supposed to represent the principalвЂ™s best interest without having regard for self-interest.ДЄt the time, when agents and principals have different interests, it becomes a source of conflict that results in miscommunication and disagreement leading to different problems and discord in the company. Utilizing performance-based compensation can be one of the effective ways for accomplishing a balance between the agentвЂ™s and the principalвЂ™s interests.Д¬ommon principal and agent relationships or agency relationships are associated with shareholders and management, lessees and lessors or financial planners and their clients. The process of resolving the differences in expectations of agents and principals is understood as reducing agency loss. This difference between the two parties (principals and agents) is understood as the principal-agent problem. Principals need agents for executing their specific transactions that lead to a difference in agreement concerning the priorities, interests, and methods. This is called the вЂњprincipal-agent problemвЂќ. In a business relationship between principals and agents, problems occur due to the disparity appearing in both partiesвЂ™ opinions, interests, and priorities. What is Agency Theory?Дefinition: The agency theory is defined as a theory that is used to explain relationships between principals and agents as well as resolve the issues arising because of a conflict of interest between a principal and an agent.ДЄgency theory is also known as вЂњagency problemвЂќ or вЂњagency dilemmaвЂќ. Therefore, Agency Theory plays an essential role by suggesting the best ways to take care of business relationships to restrain chances of rising conflicts between both parties. Hence, the action of one party can affect the other. In addition to that, it also takes part in solving those issues.Д«oth the principals and agents are interdependent. This theory is applied to clarify the vexing issues existing between shareholders (business principals) and company executives (agents). Agency theory is a type of practice employed in business-related relationships for explaining relationships between business principals and their agents.

Agency principal definition