AGENCY COST THEORY BY - BHAVYA PATHANIA & SPARSH SAXENA
AGENCY COST THEORY |
AUTHORED BY – BHAVYA PATHANIA & SPARSH SAXENA
University – OP JINDAL GLOBAL UNIVERSITY
Year – 3rd year LLB (Hons)
Address – Bhavya – Kangra, Himachal Pradesh
Sparsh – Ghaziabad,
UP
1.
Abstract
This research
paper examines the concept of agency cost theory and its relevance in
comprehending the challenges and conflicts that arise in relationships between
principals and agents. The paper begins with a historical overview of the
development of agency and its legal framework, emphasizing its significance in
corporate governance. It then introduces the concept of agency costs theory,
emphasizing how conflicts of interest between principals and agents can result
in inefficiencies and disruptions. The paper explores the differing
perspectives of principals and agents, as well as the complexities of
asymmetric information within these relationships. Additionally, it analyzes
the objective of understanding agency costs theory, particularly in the context
of Indian enterprises and ownership concentration. The research paper also
presents Indian case laws that exemplify the application of agency principles
in legal disputes. Furthermore, it discusses potential solutions for resolving
agency crises, including legislative measures, independent audit committees,
and investor protection mechanisms. The paper outlines the limitations of
applying agency cost theory to legal relationships, such as the incomplete
consideration of legal and ethical obligations and the complexities of
information asymmetry. It emphasizes the importance of comprehensive legal
frameworks, professional ethics, and non-financial considerations. The paper
concludes by underscoring the necessity of effective governance mechanisms and
an understanding of agency costs to mitigate conflicts, promote transparency,
and align the interests of principals and agents in various domains.
2.
Introduction
In a corporate
world where contract law plays a significant role, the interest of the
principal's property, rights and duties, and liabilities get divided in a
contracting agreement between a principal and Agent. This arrangement of
corporate governance is called agency. Chapter X of the Indian Contracts Act of
1872 deals with the law of agency. It is essential because all corporations
under private ownership, whether large or small, conduct most of their business
transactions through the law of an agency. It makes no difference if the
country in question has a common law system, a socialist system, or a Communist
system.
Agency refers to
the connection when one person or party (the principal) hires another (the
Agent) to perform services for him, such as performing work, selling
commodities, or managing his business. The law of agency governs the legal
relationship in which the Agent acts as the principal's representative while
interacting with third parties. In front of a third party, the competent Agent has
the legal power to act on behalf of the principal. According to the modern day,
we have understood what an agency is. It is also essential to look at the
historical development of the agency to understand agency cost theory. The
Roman Empire's official legislation never wholly embraced the notion of the
principle of representation. This denial explains the early Roman view of
contractual duty as a personal relationship tying the parties in some
quasi-mystical sense. This form of relationship allowed creditors to seize the
debtor's possessions—and, in some cases, his or her person—in some cases.
Creating such a relationship between two parties was usually done in a solemn
ceremony that required both parties to be present, certain ceremonial words to
be pronounced, and specific acts to be performed. Assigning rights or
responsibilities to a third person in such a situation was complicated.
On the other
hand, the head of the household might do business through his enslaved beings
or dependent sons, who were viewed as "long arm" extensions of the
contractual master or father rather than agents. Because of the widespread
occurrence of slavery, an actual agency relationship was not required. The
theory of principle and Agent arose in England during the Middle Ages as an
offshoot or expansion of the doctrine of master and servant. The figures of
'ballivus' and 'attornatus' were created by Anglo-Norman law. The 'ballivus'
status in his owner's household allowed him to conduct commercial transactions
for him, like the enslaved person's power to bind his master under Roman law.
Later, the 'ballivus' was granted additional autonomy, particularly in his job
as a land administrator, and he progressively gained the ability to act
autonomously for his master.
On the other hand,
the 'astronauts,' initially only a representative of one of the parties in a
lawsuit, quickly rose to prominence. Specific contracts were only valid if they
were made in a court-ordered way. As a result, the construction of this type of
contract was always required to be completed in a court action in which each
side was represented by an 'astronauts.' This was the start of the
'attornatus's' position as a general agent. During the ascent of natural law in
the 17th century, continental Europe finally recognized the notion of agency in
civil law. Hugo Grotius explained in his best-known work, De Jure Belli ac
Pacis (1625; On the Law of War and Peace), that a procurator could obtain
rights directly for his principal based on his mandate. With two exceptions, he
defeated the Roman norm that enabled enslaved people and dependent sons, but
not free people, to act directly for the household's leader. Grotius simply
stated that this norm was not in conflict with natural law. With this, we
complete the basic understanding of the historical development of agency as per
contracts.
3.
What is Agency Costs Theory?
In a society,
Specialization is productive, according to one of economics' central tenets. On
an individual level, assigning work to someone who specializes in that task is
generally more effective than doing it oneself. Legal advice, managing another
person's assets, diagnosing and advising on ailments, and precision-grinding a
cylinder or machine tool are just a few examples. Due to a lack of time or
expertise on how to best accomplish the activity, delegating such activities
may be advantageous. In practice, however, getting the full benefits of
delegating work to another person (an 'agent') is not always straightforward.
While celebrating the benefits of the division of labor and Specialization in
'The Wealth of Nations,' Adam Smith also presents what may be the first
documented account of the problems of the delegation that the division of labor
causes. Referring to the directors of stock firms that specialize in the
day-to-day management of the business as agents of the owners, he (Smith, 1776:
700) observes that being the managers instead of other people's money than of
their own, this cannot well be expected, that they should watch over it with
the same anxious vigilance with which the partners in a private co-partner
frequently watch over their own. Negligence and profusion, therefore, must
always prevail, more or less, in the management of the affairs of such a
company.
The Indian
contract act, 1872, chapter X describes "Agency," in which section
182 defines an "agent" and "principal" as: "An
"agent' is a person employed to do any act for another or to represent
another in dealings with third persons. The person for whom such act is done,
or who is so represented, is called the "principal."[1] in order to deduce the definition more
effectively, the supreme court observed that "the expression agency is
used to connote the relation which exists where one person has an authority or
capacity to create legal relations between a person occupying the position of
principal and third parties."[2] A
'principal' can be made up of a group of people carrying on a trade or business
through a partnership, a registered company, or another type of corporate body,
in addition to the individual' principal.' Section 186-187[3] defines
the creation of an agency.
1) By agreement,
this may be
a. express, i.e.,
by words or by writing, or (b) implied, i.e., by conduct,
2) By
estoppel;
3) By operation of
law;
4) By necessary
circumstances.
It is essential
to note that section 185 of the Indian contract act of 1872 states that
"consideration is not necessary" to create an agency[4].
Under this, there is a distinction between an agent and a servant: "A
servant is paid by salary or wages. An agent receives a commission based on
work done."[5] This point instigates an agent to work
specifically for his profit by way of commission to secure personal profit
leading to the concept of agency costs theory which can be explained with an
example of Internal company expense incurred as a result of an agent's activity
on behalf of a principal. Core inefficiencies, dissatisfactions, and
disruptions, such as conflicts of interest between shareholders and management,
usually result in agency costs. The acting Agent receives payment for the
agency fee. It can be inferred from Adam smith'sSmith opinion, which shows how
a condition of delegation in which principals cannot costlessly enforce the
activities they desire their agents to do, that is, where 'agency issues'
exist, can lead to efficiency losses (' negligence and profusion') and
efficiency losses (' negligence and profusion'). This 'agency issue' is stated
as agency costs theory.
It states that
two self-interested individuals see potential profits from a deal. One (the
principal) delegates physical or mental work to the other (the Agent), whose
behaviors and effort level affect both parties' payoffs. The principal pays the
Agent, and the principal adopts the position of the residual claimant in the
relationship, holding claims to net cash flows resulting from disparities
between inflows and promised payments to other claim holders.The Agent and the
principal have opposing viewpoints. For example, top executives acting as
representatives for the firm's shareholders may prioritize 'empire building,'
bonuses, leisure time, and other benefits over maximizing shareholder profits
('conflict in outcome-type preferences').Similarly, managers may engage in
capital expenditures that increase the firm's chances of survival. At the same
time, shareholders will likely want them to invest in high-return, but often
riskier, assets to spread risk ('conflict in risk preferences'). There are
undoubtedly many additional conflicts of interest between the principal and the
Agent. All of this implies that the Agent (or agents) may not be acting in the
principal's best interests. However, when these competing interests are paired
with asymmetrically disseminated information between the principal and the
Agent, the situation becomes much more complicated.
In the majority
of agency partnerships, both the principal and the agent will be required to
bear positive monitoring and bonding expenses (both non-pecuniary and
pecuniary), and there will be some degree of discord between the agent's
judgments and those that would maximize the principal's welfare. A cost of the
agency relationship is also the cash equivalent of the principal's diminished
welfare as a result of this divergence. This cost is referred to as the
"residual loss." The costs of the agency are defined as the sum of
three components: 1. the monitoring expenditures of the principal; 2. the
bonding charges of the agent; and 3. the residual loss.
Also, even if
there isn't a principal-agent relationship in the traditional sense, there are
still agency costs involved in any scenario that calls for two or more
individuals to work together on a project (like writing this paper, for
example). The topic of shirking and monitoring of team productivity was brought
up by Alchian and Demsetz (1972) in their article on the theory of the firm.
According to this perspective, it is clear that our idea of agency costs and
their significance to the theory of the business is strongly tied to this
issue. In their study, Alchian and Demsetz (1972) discussed the theory of the
firm.
a)
Agency Cost Types
1.
Agency Direct Cost
Monitoring
costs: When management choices are made with the interests of the company's
shareholders in mind, they hinder management's capacity to accomplish its job.
As a result, the cost of keeping the board of directors is included in the cost
of monitoring to some extent. Another example of a cost for monitoring
available to a company's employees is the employee stock option plan.
Bonding
costs are incurred when a contract is entered into between the corporation and
the agency. Even after acquiring a company, management may choose not to take
on new positions.
Residual
Losses: If the monitoring bonding costs are insufficient to cause the principal
and agent interests to diverge, further expenses, known as residual costs, are
incurred.
2.
Agency Indirect Cost
Indirect
agency costs are the expenses incurred as a result of the missed opportunity.
For example, management could take on a project that could lead to their
expulsion from their employment. However, the company's stockholders believe
that once the project is completed, the company's value will rise. However, if
the idea is rejected, the stockholders' stakes will suffer considerably.
Because it is not directly quantifiable but has an impact on management and
shareholder interests, this expense is included in the indirect agency costs.
b)
How may agency costs be cut?
The most common
strategy to manage a company's agency costs is to implement an incentive
program, which can be of two types: financial and non-financial incentive
programs.
1.
Financial Incentives Plan
Agents
benefit from financial incentives because they are encouraged to act in the
best interests of the company and its clients. Such incentives are offered to
management when a project is successfully completed or when the relevant
objectives are met. Some examples of the financial incentives scheme are as
follows:Profit-Sharing Plan: As part of the incentive plan, management is
entitled to a percentage of the company's profits.
Employee
stock options allow employees to purchase a set number of shares at a price
that is often lower than the market value.
2. Non-financial
Incentives Program-The financial rewards strategy is less prevalent in
comparison. These are less effective at lowering agency costs when compared to
the financial incentives approach. Examples of common ones include:In-kind
rewards and recognition from peers and colleagues.Benefits and services for
businesses.enhanced workplace.more or better opportunities
4.
The objective behind
understanding Agency Costs Theory
Indian
enterprises, and primarily Asian firms, are either family-owned or managed by
the government, making ownership traditionally concentrated since their
inception. In today's Indian corporate sector, ownership concentration,
particularly in the hands of a few prominent promoters, has become the standard
rather than the exception.
Furthermore,
in many countries (including India), the shift from democratic to plutocratic
voting rights—from one vote per shareholder to one vote per share—has
significantly altered the mechanism of corporate governance and the status and
prerogative of large shareholders in public limited companies. Furthermore,
some promoters obtain more voting rights than their ownership rights through
tunneling, cross-holding, pyramid effects, and direct ownership. These
large/dominant owners can now affect the corporate governance of Indian
manufacturing companies in two ways. First, they can protect the interests of
the entire shareholder community by advancing the wealth maximization goal by
better monitoring and regulating management's opportunistic behavior.
Conversely, these large owners can expropriate smaller shareholders and
unfairly extract more benefits at their expense. Expropriation can take many
forms, including diverting firm resources or assets through self-dealing
transactions (Johnson et al., 2000), tunneling one firm's resources and profits
to another to enjoy more cash flow rights, especially in situations where a
dominant owner has controlling stakes in two different firms with different
cash flow rights, and behaving subversively with minority owners and preventing
them from exercising their de jure ownership.
The developed
world's corporations, such as those in the United States and the United
Kingdom, are dealing with both types of agency issues, namely, conflict of
interest between managers and shareholders (type 1 or vertical agency crisis)
and conflict of interest between minority and dominant shareholders (type 2 or
horizontal agency crisis), with the latter being much more prevalent in the
Indian corporate sector. The agency contract, or the contractual relationship
between the principals and the agents, is referred to as "incomplete"
because, while the agents are typically expected to think and act in the best
interests of the principals, in practice, they take advantage of freeriding
opportunities to realize their gains at the expense of the principals
(Kirchmaier & Grant, 2005; Shleifer & Vishny, 1997). Delegation of work
is frequently driven by the principal's need for more information, talents, or
expertise to do the activity themselves, knowledge gaps that explain why trade
gains exist in the first place. However, it implies that the principal needs to
be at a disadvantage in assessing the Agent's genuine understanding and efforts
in carrying out the assigned assignment. Self-interested agents may hide their
genuine qualities (e.g., a lack of adequate abilities for completing the
activity at hand) or even falsify signals (e.g., misrepresenting their C.V.s or
the degrees they possess) to secure a job and earn the corresponding rents,
complicating the issue. As a result, the so-called 'hidden characteristics'
problem arises when informational asymmetry exists before the principal
contracts an agent.
Now that
we have understood the objective behind the root cause of agency costs theory,
it is essential to look at some of the researchers’ opinions and trends in
their study. In a recent study on the listed firms of the New Zealand Stock
Exchange from 2004 to 2007, Gaur, Bathula, and Singh (2015) supported the
function of large owners and showed how a lack of ownership concentration leads
to increased agency difficulties, resulting in poor performance of such
organizations. Other recent studies, such as Abbasi, Asadipour, and Pourkiyani
(2017) in the context of companies listed on the Tehran Stock Exchange and
Mittal and Anjala (2018) in the context of companies listed on the National
Stock Exchange of India, provide evidence of large owners' role in minimizing
agency crisis and improving firm performance. The provisions listed under the
statute of the Indian contract act of 1872, like ratification under sections
196 to 200. Also, revoking the agency under section 201 to 210[6] help
reduce the risk of agency crises.
5.
Indian Case Laws
Chairman L.I.C
v. Rajiv Kumar Bhaskar[7] in
this situation, the employer was required by L.I.C.'s wage saving scheme to
deduct the premium from the employee's salary and deposit it with L.I.C. When
the employee died, his heirs discovered that the employer had failed to do so,
leading the policy to lapse. A paragraph in the acceptance letter was alluded
to, in which the employer stated that he would operate as the employee's Agent
rather than L.I.C.'s. It was determined that the employer was operating as the
company's Agent, rendering the company (L.I.C.) liable as a Principal due to
the wrongdoing of the Agent (the employer).
Harshad J. Shah
and Anr. v. L.I.C. of India and Ors.[8] to
increase business, L.I.C. agents collect premiums from policyholders in cash or
by cheque and deposit the money collected in the L.I.C.'s office; this practice
has been going on directly within the knowledge of the L.I.C. administration,
despite departmental instructions that the agents are not authorized to collect
premiums. It suggests that L.I.C. was careless in its service to the insured
and was hence accountable.
Narandas
Morardas Gaziwala and Ors.[9], a
Surat-based partnership firm that specialized in lace and silver thread,
established relationships with another firm, Krishna and Company, who served as
their Agents for selling their goods on commission throughout the three districts
of Madras. Murugesa Chettiar, one of the partners, took over all of the firm's
assets and debts upon the firm's dissolution. Krishna & Co. became indebted
as a result of their actions in 1951. Murugesa Chettiar (plaintiff) signed a
promissory note for Rs. 7,500/- in favor of Narandas Morardas Gaziwala on April
1, 1951, the sum adjudged to be due and payable by Krishna & Co. The
plaintiff filed a claim in Kancheepuram's District Munsif's Court, demanding
that accounts be produced from April 1, 1951, until the date of the action to
ascertain the amount owing and payable to him. In response, the Surat company
filed a case against the plaintiff in the Court of Subordinate Judge,
Chingleput, to recover the money owed under the promissory note. The parties
agreed that the cases would be tried concurrently.
6.
How to resolve agency crises?
The maxim
Delegates contest delegate is well-known in the field of agency law. The
principal selects an agent because he believes in his expertise and honesty. As
a result, the Agent usually needs help to delegate the job given to him by his
principal. Therefore, The Indian contract act 1872, under Chapter X,
"agency," describes the duty of an agent towards its principal, which
works as checks and balances to restrain agency crises from happening
occasionally. Section 211 "agent's duty in conducting principal's
business." Section 212 "skill and diligence required from the
agent"[10]. Section
212[11]
limits the Agent's liability to "direct consequences." ^ It provides
that the Agent must "make compensation to his principal in respect of the
direct consequences of his neglect, want of skill or misconduct, but not in
respect of loss or damage which are indirectly or remotely caused by such
neglect, want of skill or misconduct"[12]
Section 213[13] duty of
maintain accounts. Even though the principal is fully informed about the
Agent's characteristics, it may still need to be at a disadvantage when it
comes to the activities done by the Agent. More specifically, the disadvantage
(i.e., informational asymmetry) is concerned with the Agent's action (or effort
level), whether it was the proper one given the circumstances, and which
conditions exactly. During such crises, Section 214[14], the
"agent's duty to communicate with the principal" [15],
comes into play, reducing agency crises' chances. The principal and Agent share
a fiduciary relationship which at any cost cannot be hampered.
In India's
context, Kumar and Singh (2012) propose creating a favorable climate and
enforcing strict legislation to preserve minority shareholder rights. Hamid et
al. (2016) state that an independent audit committee can help a corporation
reduce expropriation. In a recent study of Indian manufacturing firms, Altaf
and Shah (2018) found that after a certain level of ownership concentration,
large shareholders expropriate minority shareholders, resulting in higher
agency costs between majority and minority owners and lower company
performance. In a recent study of Indian manufacturing firms, Altaf and Shah
(2018) found that after a certain level of ownership concentration, large
shareholders expropriate minority shareholders, resulting in higher agency
costs between majority and minority owners and lower company performance.
According to the study, the agency crisis evolves from an owner–managers
conflict (vertical agency crisis) to a majority owner–minority owners conflict
after a high level of ownership concentration (horizontal agency crisis). The
report also emphasizes the necessity for an alternative suitable governance mechanism
in India, such as investor protection.
7.
DEMERITS
Potential
Limitations or Drawbacks of Applying the Agency Cost Theory
- Incomplete Legal Framework: The
agency cost theory primarily focuses on economic incentives and monitoring
mechanisms to align the interests of principals and agents. However, it
may overlook or downplay legal and ethical obligations in legal
relationships. Legal frameworks encompass a more comprehensive range of
principles, including fiduciary duties, professional ethics, and legal responsibilities,
which may need to be adequately addressed by the economic-centric
perspective of the agency cost theory.
- Lack of Consideration for Legal
Standards: Legal relationships, particularly those involving attorneys,
involve professional standards and obligations that are regulated by
specific legal rules and codes of conduct. The agency cost theory may need
to account for these legal standards fully and may oversimplify the
complexities of legal ethics and professional responsibilities. Thus, the
theory may need to provide a more complete understanding of the dynamics
within legal relationships.
- The complexity of Legal Agency: In
legal contexts, agency relationships can be more complex than in economic
or corporate settings. For example, lawyers act as agents for their
clients, but they also have broader fiduciary duties to the court and the
legal system. The agency cost theory may need to adequately address the
legal agency's unique aspects and ethical considerations beyond financial
incentives and conflicts of interest.
- Non-Financial Considerations: Legal
relationships often involve non-financial objectives and considerations
not fully captured by the agency cost theory. Attorneys, for instance,
have a duty to provide competent representation, act in the best interests
of their clients, and uphold the rule of law. These obligations may need
to be adequately addressed by a theory primarily focusing on economic
incentives and financial alignment.
- The complexity of Information
Asymmetry: The agency cost theory assumes that principals have perfect
information about the Agent's actions, which may not be accurate in legal
contexts. For example, information asymmetry between attorneys and clients
can be significant, leading to challenges in monitoring and controlling
agency costs. The theory may need to fully address the complexities of
information asymmetry and its unique challenges in legal
relationships.
In summary,
while the agency cost theory has been primarily developed and applied in
economics and finance, its application to legal contexts may have limitations.
The theory may need to fully capture or address the legal framework, ethical
considerations, professional responsibilities, and non-financial objectives
that characterize legal relationships.
While agency
cost theory offers valuable insights into corporate governance and management,
there are particular examples that highlight some of its possible downsides.
Here are a couple of such examples:
Enron
Corporation: The 2001 bankruptcy of Enron is a classic case
demonstrating the limitations of agency cost theory. Enron officials used
deceptive accounting procedures to alter financial figures, resulting in the
company's bankruptcy. This case highlights how executives might incur agency
costs when they prioritize personal gain over the interests of shareholders and
other stakeholders, undermining the effectiveness of corporate governance
procedures.
Volkswagen
Emissions Scandal: In 2015, the Volkswagen emissions scandal showed
that the firm had put software in its vehicles that allowed it to alter
emissions test results. This case demonstrates how managers might incur agency
costs when prioritizing short-term financial performance and market share over
legal and ethical responsibilities. The affair led to enormous financial losses
for Z.A. and legal ramifications for Volkswagen.
Without a link
between a principal and an agent, there is no agency problem. In this case, the
Agent completes a task on behalf of the principal. Principals frequently hire
agents due to differences in skill levels, employment positions, or time and
access constraints. For example, a principal may employ a plumber (the Agent)
to repair plumbing problems. Although the plumber's best goal is to earn as
much money as possible, they are responsible for executing in whatever
situation benefits the principal the most.
The agency issue
comes from a conflict between incentives and the presence of discretion in job
fulfillment. If an agent is incentivized to operate in a way unfavorable to the
principal, the Agent may be persuaded to do so. For example, the plumber may
make three times as much money in the plumbing scenario by recommending a
service that the Agent does not require. An incentive (three times the salary)
is present, resulting in the agency problem.
8.
Conclusion
In summary, the
agency cost theory sheds light on the challenges and conflicts that arise in
relationships between principals and agents. It emphasizes that agency costs
can occur when agents prioritize their own interests over those of principals,
resulting in inefficiencies and conflicts.
The theory of
agency presupposes that all parties involved are entirely rational, indicating
that contracts between the principal(s) and the Agent (s) will contain all
accessible knowledge and that the contract's provisions will account for all
potential future events (so-called "full contracts"). In contrast to
transaction cost economics, agency theory abstracts from the costs of
incorporating information into contracts and the possibility that contracts may
be incomplete due to a lack of knowledge about all possible future events or
actions.
While the
information about the characteristics of the Agent (s) or their actions is
assumed to differ between the principal(s) and the Agent (s), the theory
assumes that each of the parties makes full use of the information available to
it in designing the contract and deciding how to act, respectively. The issues
and solutions associated with job delegation under information asymmetry and
conflicting interests between two or more persons are studied by agency cost theory.
It is predicated on the parties' rationality and self-interest and addresses
both ex-ante ('hidden characteristics') and ex-post ('hidden action')
information asymmetry issues. Even in an age of inexpensive communication,
information asymmetry will exist, and principals will never be able to
anticipate every difficulty. In addition, the increased labor cost must be
factored into the agency's cost toll. Firms use interlocking contracts,
detailed service level agreements, tiered contractual commitments, redundant
agents, extensive control provisions, and liberal departure rights to reduce
agency risk. Furthermore, macroeconomic pressures may make it easier for
principals to use these technologies to supervise agents.
The theory
recognizes the influence of economic incentives, monitoring methods, and
information imbalances on these relationships.
In the case of
Indian businesses, the concentration of ownership and the potential for
dominant shareholders to exploit the situation worsen the issues related to
agency. However, strict legislation and governance mechanisms, such as
independent audit committees and measures to protect investors, can help
alleviate agency crises.
Nevertheless,
there are limitations to applying the agency cost theory to legal relationships.
The theory's economic-centric perspective may not fully capture legal
frameworks, professional ethics, fiduciary duties, and non-financial
considerations. The complexity of information imbalances and the unique
dynamics of legal agency also present challenges.
To tackle agency
crises, the Indian Contract Act of 1872 provides guidelines for agent conduct,
communication, and maintenance of accounts. Agents' duties toward principals,
fiduciary responsibilities, and checks and balances are crucial in minimizing
agency costs.
While the agency
cost theory offers valuable insights, real-world examples such as Enron and the
Volkswagen emissions scandal highlight the need for comprehensive legal
frameworks, ethical considerations, and a broader understanding of the dynamics
within legal relationships.
In conclusion,
understanding agency costs and implementing effective governance mechanisms are
vital for mitigating conflicts, promoting transparency, and aligning the
interests of principals and agents in various domains, including corporate
governance and legal relationships.
[1] Avtar Singh, Law of Contract and
Specific Relief 733.
[2] Syed Abdul Khader v. Rami Reddy, 2
SCC 601 (1979).
[3] Indian contract act § 186 (1872).
[4] Avtar Singh, Law of Contract and
Specific Relief 739.
[5] Performing Right Society Ltd v.
Mitchell & Booker (Palais de Donse) Ltd, 1 KB 762 (1924).
[6] Indian contract act § 210 (1872).
[7] Chairman, L.I.C. Of India And Ors
v. Rajeev Kumar Bhaskar, ACJ 86 (2003).
[8] Harshad J. Shah and Anr v. L.I.C.
of India and Ors, 5 SCC 64 (1997).
[9] Narandas Morardas Gaziwala &
Ors v. S. P. Am. Papammal& Anr, SCR 38 (1966).
[10] Park v. Hammond, 128 ER 1127
(1816).
[11] Indian contract act § 212 (1872).
[12] Krishna Chandra Ganpati v. K.
Hanumantha Rao, 241 AIR (Ori 1950).
[13] Indian contract act § 213 (1872).
[14] Indian contract act § 214 (1872).
[15] JJayabharathi Corporation v. Sv.
P.N. Sn. Rajesekara Nadar, AIR 596 (SC 1992).