How is agency theory relevant today?

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jraineharrison eNotes educator| Certified Educator

Agency theory developed in the 1960s and 1970s. The idea asserted that a principal (organization, leader) delegated authority to an agent (manager). The agent was then expected to act in the best interest of the principal, but there was no assurance that an agent would always act in the best interests of the principal or that the agent's behavior would be appropriate.

Today, the principal and agent relationship continues to exist. Managers are often considered agents of organizations, which are the principals. Principals often delegate work to the agent, expecting the agent to carry out that work in the best interest of the organization and the organization's stakeholders.  Unfortunately, the agent does not always act in the best interest of the principal. The agent may act in his or her own best interest or the best interest of that agent's particular division. This creates a dichotomy in the agent and principal relationship. Furthermore, when an agent does not act in the best interest of the principal, the agent places the principal at financial risk and possibly legal risk as well.