Which one of the following theory of corporate governance focuses on the principal-agent conflict, where managers may prioritize their own interests over those of shareholders, thereby necessitating monitoring, incentives, and control mechanism ?
Agency Theory
Agency Theory — option 2. The words “principal-agent” in the question are the theory’s own vocabulary.
The idea. Set out by Jensen and Meckling in 1976, agency theory begins from the separation of ownership and control in the modern corporation, first described by Berle and Means. Shareholders own the firm but do not run it; managers run it but do not own it. The shareholder is the principal, the manager the agent, and because their interests differ and the agent knows more than the principal does — information asymmetry — the agent may pursue his own ends: empire-building, perquisites, excessive caution, or short-term earnings that flatter his bonus.
| Agency cost | What it is |
|---|---|
| Monitoring cost | Borne by the principal — audit, the board, independent directors, disclosure |
| Bonding cost | Borne by the agent to signal good faith — contractual restrictions, voluntary reporting |
| Residual loss | The remaining shortfall no contract can remove |
The remedies it prescribes are exactly the three the question lists: monitoring through independent boards, audit committees and disclosure; incentives that align the agent with the principal, such as stock options and performance-linked pay; and control mechanisms such as the market for corporate control, debt covenants and the threat of takeover.
The competing theories, for contrast.
| Theory | View of the manager |
|---|---|
| Stewardship | The manager is a steward, motivated by achievement and duty rather than self-interest; trust and autonomy work better than monitoring — the direct opposite of agency theory |
| Stakeholder | R. Edward Freeman: the firm answers to employees, customers, suppliers, creditors and the community as well as shareholders |
| Resource dependence | Pfeffer and Salancik: the board’s value lies in linking the firm to outside resources — capital, expertise, legitimacy — not in policing management |
In India these concerns are addressed by the Companies Act, 2013 and by SEBI’s Listing Obligations and Disclosure Requirements, which mandate independent directors, audit committees and related-party disclosure.
Hence, the answer is Agency Theory.
Similar Questions
Assertion (A) : Bad corporate governance can cast doubt on a company's reliability.
Reasoning (R) : Companies that do not cooperate sufficiently with auditors can publish non-compliant financial results.
Code :
Which among the following are also called Corporate Social Responsibility ?
(a) Corporate Conscience
(b) Corporate Citizenship
(c) Responsible Business
Code :
Which one among the following is not a part of Corporate Social Initiatives ?
Which of the following is/are the component(s) of Ethics by field of interest ?
What is the right sequence of four psychological sub-processes in ethical action given by James Rest ?
CSR is important because :
Assertion (A) : Corporate behaviour towards stakeholders is an important concept in practice and a central part of corporate Governance.
Reason (R) : It has to be ethical, legal and responsible behaviour for organisation, stakeholders and society.
Code :
Which one of the following is not a principle of corporate Governance ?
Match the items given in the List - I and List - II and suggest the correct code :
List - I List - II (a) Ethics (i) Right code of behaviour for a group or profession (b) Morality (ii) Prescribes right conduct for everyone (c) Moral standard (iii) Needs some inclination to follow morality (d) Meta Moral Standard (iv) Practical and pragmatic Code :
Assertion (A) : When a corporation acts ethically and socially responsible in its business decisions and strategic planning, then the corporation will be more sustainable.
Reason (R) : Socially responsible corporate behaviour is increasingly seen as essential to long-term survival of companies.
Important Questions from Corporate governance and business ethics
Corporations are controlled and directed by which one of the following?
Which among the following is not a correct statement with regard to Corporate Governance in India ?
As per the Anglo-Saxon Model of Corporate Governance, the authority lies with the following. Arrange these in decreasing order of authority.
A. Board of Directors
B. Managers
C. Shareholders
D. Employees (Company)
E. Trade unions
Choose the correct sequence from the options given below
Assertion (A) : Corporate governance is an important instrument of investor protection.
Reason (R) : Strong corporate governance is indispensable to resilient and vibrant capital markets.
Which one of the following options is correct?
Which one of the following is not a norm of corporate governance ?
