Agency Theory in Shambles? But Your Agency Doesn't Have to Be

Agency theory has long dominated the science of business and economics. It is an (or used to be) one of the most popular theories in these realms. But before I begin to say how it has fell off, lets take a look at what agency theory is.

Bendickson et al. (2016) Agency theory is a framework used in economics, finance, and management to explain and address the issues that arise in relationships where one party (the principal) delegates work to another party (the agent), who performs that work. Particularly concerned with resolving problems that can occur in such relationships, this theory showcases the differing goals and the information asymmetry between the principal and the agent. The key concepts in agency theory include:

1. Principal-Agent Relationship - The principal hires the agent to perform a task on their behalf. For example, shareholders (principals) hire managers (agents) to run a company.

2. Information Asymmetry - The agent often knows more about the task than the principal, creating trust and control issues. This information gap can lead to the agent acting in their own interest instead of the principal's.

3. Incentive Alignment - To mitigate agency problems, principals can design compensation schemes that align the agent's incentives with their own, such as offering stock options to managers to link their interests with the company's performance.

These three components make up the agency theory. But what is going on in the year 2024 so that it is falling short of describing the reality we live in?

The fall of the theory

The theory does not account for social entrepreneurship. An important aspect in your project life. As a result, complex agency issues exist requiring unique governance mechanisms. The current agencies are managed in much different ways.

As a concept, agency management has been said to include various great methods of governing your agency . In practice, managing client relationships involves using CRM software to track all interactions, from emails to meetings. This enables the agency to stay attuned to client needs and respond swiftly to any issues.

Meanwhile, other agency time tracking software helps exactly in this area. Pick wisely and you will see how good it can be.

Wrap up

Agency theory might be going through a crisis but your agency doesn't have to! Make sure to be aware of the current changes that go through the market and be ready and vigilant to stand your ground. Good luck.