2.Agency theory
　　2.1 Definition of agency relationship
　　“A contract under which one or more persons （the principals） engage another person （the agent） to perform some service on their behalf which involves delegation some decisions making authority to the agent.”
　　<1> Agents: one person is employed by others （principal） to carry out a task on their behalf.
　　<2> Principles: one person employs others （agent） to carry out a task on his behalf.
　　<3> Agency is acting on behalf of another （principal） in dealing with others.
　　2.2 Accountability and fiduciary duty
　　<1> Accountability: in the context of agency, means that the agent is answerable under the contract to his principal and must account for the resources of his principal and the money he has gained working on his principal’s behalf.
　　<2> Fiduciary duty: a duty imposed upon certain persons because of the position of trust and confidence in which they stand in relation to another.（Directors own a fiduciary duty to the company not to individual shareholders）
　　a. Full disclosure of information held by the fiduciary （agent）
　　b. A strict duty to account for any profit received as a result of the relationship
　　c. A duty to avoid conflicts of interest
　　<3> Accountability in agency theory and corporate governance
　　a. Performance: agent has a contractual obligation to perform agreed legal task with reward be paid.
　　b. Obedience: agent must act strictly in accordance with his principal’s lawful and reasonable instruction.
　　c. Skill: agent should maintain the standard of professional skill and care.
　　d. Personal performance: agent owes a duty to perform his task himself and not to delegate, except a few special circumstances （required by law, etc）
　　e. No conflict of interest: agent owes a duty not to conflict of interest with his principal.
　　f. Confidentiality: agent must keep confidence with principal’s affairs even after the agency relationship has ceased.
　　g. Benefit: agent must hand over all benefit to his principal unless it is allowed to retain.
　　2.3 Agency in the context of corporate governance
　　2012ACCA《P1專業(yè)會計師》基礎(chǔ)課程講義（3）
　　2.4 Agency problems and agency costs
　　<1> Agency problems in delegation
　　a. The principal and agent have a conflict of interest, or they have different attitude in risk management.
　　b. It is difficult and expensive for the principal to verify what the agent is actually doing （introduce mechanisms to control; spend time, money and resource to monitor）。
　　<2> Agency costs
　　a. The principal spend time, money and resources to monitor the activities of agents. （Information Asymmetry）
　　b. To introduce mechanisms to control the activities of the agent
　　<3> Resolving the agency problem: alignment of interest
　　a. Profit-relate pay / economic value added pay
　　b. Reward manager with shares: management buy-in/buy-out, managers become joint owner-managers.
　　c. Executive share option （ESOPs）： increase in company value lead to increase in share price.
　　d. Monitoring mechanisms （monitor mangers’ behavior）： NEDs, management audit, additional report, and significant shareholder engagement.
　　2.5 Transaction costs theory
　　<1> Definition: companies try to keep as many transactions as possible in-house （vertical integration） in order to reduce uncertainties about dealing with suppliers （purchase price and quality）。
　　a. Search and information costs （find the supplier）
　　b. Marketing, bargaining and decision costs （purchase component）
　　c. Policing and enforcement costs （monitor quality）
　　<2> Relationship with agency theory
　　a. Difference: transaction costs theory focus on opportunistic; agency theory focus on agency problem and costs
　　b. Similar: they all deal with conflict of interest, managers should pursue shareholders’ best interests rather than their own
 
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