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Agency Theory
In business, the hierarchical leadership system allows business leaders such as principals to delegate duties to their business representatives through a system known as the agency theory. This theory examines how agents and principals relate and perform their responsibilities for a common purpose. A relatable example of the agency theory is in a corporation system whereby business shareholders elect board members to make decisions that consider the shareholders interests, operating within the agreed-upon guidelines. In such a setup, the shareholders are the principals, while the board members are the agents. Thus, agency theory is the system whereby principals and their agents undertake different tasks focused on a similar course and following the terms set in the contract.
Duties of the Agent and the Organization
Agents are expected to uphold the duty of loyalty by ensuring that the principals interests are prioritized in every decision made. In return, the organization should compensate the agent for their services and be liable for any crimes, such as tort crimes. For instance, the organization is held accountable if the agent makes an irrational decision that costs the organization in any way. Additionally, the agent is expected to adhere to the terms implied in the contract, including the duty to remit sums, not make secret profits, avoid conflict of interest, and maintain accounts. Breach of any of the mentioned terms attracts a sanction depending on the rules set. Similarly, the organization must uphold the general contract duties to inform the agent of any life-threatening issues surrounding their job descriptions, such as security or health threats. Finally, the principal or the organization should not interfere with the agents work but should restate instructions accordingly.
Creation of an Agency
There are different ways of creating an agency, including express appointment, operation of law, and ratification. Agency by express appointment is when the principal chooses a trusted individual who can make decisions on their behalf, agree on the terms, and the relationship debut. Under the operation of law, the two parties draft an agreement containing the terms of practice, legal and welfare considerations. Then, both parties sign a written agreement, and the agency is officially created. Lastly, an agency can be formed by ratification whereby the principal approves and adopts an act that recognizes an agents duties allowing the representative to act on behalf of the principal after the act is passed.
Termination of an Agency
The first step is to review the terms of the agreement and ensure they are all maintained. This rule applies to written and oral contracts to ensure that the agent does not file for a lawsuit citing breach of contract. Next, the two parties must proceed with the termination process based on mutual agreement on the terms initially stipulated in their deal. During the contract termination, the reasons for termination must be cited in writing clearly for reference purposes if the need arises. Finally, the third parties must be informed of the termination of contact to ensure that they also cut all transactions.
Pros and Cons of Agency theory
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