Agency theory basics

Agency theory here very, very simple just real basics. Okay so what we have is an owner and some directors. Um all we're doing is just giving the, uh, giving these people just different terms really. Okay, so the owner of the business could be called -not the owner- here but the principal. And the directors who work for the owner, they're no longer called directors - they are called the agents. So the agency theory is when you have people working for the owner, but the owner -that principal- is not actually involved. And so therefore the principal has to trust the agents to work in his or her best interests. [Text balloon bubble appears from the principals mouth asking "Are you lot doing the job right?"] That's the sort of thing he needs to ask all the time. Now, him (the principal) asking that is in itself what we call a 'cost' of this agency relationship. Because he's not there, he has to constantly ask 'are you doing the right job?' Okay, and so we call this a cost of the agency relationship or, simpler, agency costs. So what are the more specific examples of agency cost well having an audit - that's checking the agents are doing their job right. Having annual general meetings in order to check that the agents are doing their job right, Have an extraordinary general meetings to check that the agents are doing their jobs right. Hope it helps.