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
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.
Social responsibility of business while appropriating natural resources by a corporate entity has been recommended in which one of the following?
Disclosure of corporate governance practice and its compliance has been stipulated in which one of the following?
Kumar Mangalam Birla Committee Report, Ramesh Chandra Committee Report, Cadbury Committee Report primarily focus on which one of the following?
'The continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.'
This may be attributed rightly to which one of the following?
Read the following passage and answer the questions :
Jensen examines the dynamics of corporate takeovers and challenges prevailing misconceptions surrounding them. He argues that takeovers are not merely hostile disruptions but serve as a crucial mechanism of the market for corporate control. According to Jensen, inefficient management teams often fail to maximize shareholder value and takeovers act as disciplinary tool by transferring control to more competent managers. He emphasizes that while popular belief portrays takeovers as destructive to employees and communities, empirical evidence suggests that they frequently generate significant economic gains by reallocating resources to more productive uses. Jensen distinguishes between the folklore-emotional and political arguments against takeovers depicting as harmful to employees and society and the science, which demonstrates thier role in improving efficiency and shareholder wealth. He also addresses concerns about debt financing in leveraged buyouts, contending that high leverage can impose financial discipline on managers by reducing wasteful spending. Ultimately, Jensen frames takeovers as an essential corrective force within capitalism, countering managerial inefficiency and aligning corporate behavior with shareholder interests. His analysis laid the groundwork for modern corporate finance debates on governance, agency costs and the value-creating potential of mergers and acquisitions.
Statement (I) : The science of ethics is a normative science.
Statement (II) : Normative sciences judge the value of the facts in terms of an idea; concerned with judgements of ‘what ought to be’ but not with factual judgements.
Code :
Assertion (A) : Decisions in small matters largely tend to set a pattern for the more important ones you may make as managers.
Reasoning (R) : A multi-industry survey conducted in the USA indicated that 40% of the managers said that their superiors had at some time told them to do certain things unethical.
Code :
Important Questions from Corporate governance and business ethics
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 ?
Which one among the following is not a true statement?
Ethics are moral principles and values which:
