Agency Theory

Duncan Angwin
 Basic Concept
Agency Theory focuses on relationships between parties
where one delegates some decision making authority
to the other. In these situations, one party (the
‘principal’) delegates responsibility to another party
(the ‘agent’) to take decisions on their behalf. In the
modern corporation, for instance the principal would
be shareholder, whilst the ‘agent’ would be the
manager.
Other agency relationships exist between employers and
employees, between professionals such as lawyers and
doctors and their client and between public servant
and citizens.
 Extended Vision
• Whereas shareholder are interested in
maximizing their investment and agent is
interested their own comfort bargains
• Multiple Role – A venture capitalist can be a
principle to entrepreneur and agent to
investors
• Blue Circle PLC an international cement company invested in unrelated business then liquidated
it and made substantial loss. In this situation they appointed a new CEO Haythornthwaite. Soon,
LaFarge French Cement Giant offered 420p to Blue Circle.
• In defence, company was re-evaluated and shared were valued at 486p
• CEO came with many other options but were dismissed as the shareholder were not getting any
cash benefit in short run.
• White Squired (other company invest in BCP) or White Knight (friendly company may takeover)
• LaFarge took 19.9% share from market and 9.6% from bank and offered new bid of 4.50 per
share
• Later other banks and shareholder supported LaFarge gaining them 44.5% equity in BCP
• Haythornthwaite came up with three options 1. achievement of an early deal with LaFarge 2.an
acquisition to move out of LaFarge reach 3.A merger with another party. inorder to get higher
bid from La Farge, where they offered 470 without dividend
• Finally La Farge offered 495p with dividend which was sensible price deal for institutions which
considered a large percentage of 33% (the profit were below the forecast and EPS were
deteriorating)
• The company was take over and CEO got job in another company
 Agency Problem
• The interest of the principle either diverge or
conflict (agents enjoys at the cost of principal)
• The problem of checking / monitoring how
agents are performing
• Different attitude towards risk, leading to
different preference in action
 Evidence of Agency Problem
• The Shirking – not putting about agreed amount of efforts is
known as moral hazard
• Agent tend to invest in lower cost and short term gain instead
of long term investment as their contract is of short term
• Managers tend to stay away from risk for eg diversification as
it immediately reduce the firm’s value
• Resource management – personal spending, non-disclosure
of low interest loans, diversifying investment from free cash
flow, instead of paying back to shareholder
Mechanism to control Agency Cost
• Reward to agency by high pay, stocks and
other incentives
• Performance and Payreview (internal audit)
• Self serving managers from board – it should
not minimize the execution of agents.
• External Factor – Large minor investors has
information to share
 Linking Agency Theory to SM
• Corporate Governance
• Corporate Strategy
• Competitive Strategy
• Internal Controls
 Case study revisit
• Reason to bid
• Defence
• CEO as a potential agency problem
Resource Based View of the Firm
 Basic Principles
• Internal capacity of the firm and firm
performance (Barney 1991)
• Valuable, Rare, Imperfectly imitable and
imperfectly substitutable
• Interlink with IO (Industrial Organisation
Economics)
 Delta Case Study
• Selling stock trading and account settlement
automation.
• It contributes 33% of group turnover
• 60% of revenue coming from BUS (provider of
share trading services)
• Board has some knowledge on software and
are dealt by the IT Executives
 What is resource
• Resources (tangible)
• Capabilities (intangible)
 Characteristic of Resource
VRIN
• Valuable
• Rare
• Imperfectly Imitable
• Non Substitute
 VIRO / VRIO (Barney 2002)
• Value
• Imitable
• Rare
• Organisation
 Linking the resources to strategic
management
• Competitive Strategy
– Competence
– Culture
• Corporate Strategy
– Change
– Dynamic Capabilities
 Case Revisit
• Providing reassurance to the client that
companies like BUS uses their software and
revisit VRIN
• Having a business approach rather than an IT
approach
• Adapt the sales pitch to customers
 Summary
• VRIN to evaluate a resource view of an
organisation