of Nations.
Agency
Agency is a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent.
This separation of ownership and control has led to the notorious problem. The problem is the agents do not necessarily make decisions in the best interest of the principal. They prefer pursuing the highest bonuses and maximise their own perceived interets rather than maximisation of the their long term wealth. They see more short term benefits and gaining quick profit.
They are said to be more tempted to supplement their salaries with many prerequisites (holidays, office equipment and others). This led shareholder to control the management of the company. This opened the door for the corporate governance. Therefore the agency theory of corporate governance emphasises on the balancing power between the board and shareholders.
The shareholder has also the power to control over the management by: Voting, Remuneration contracts Annual report, Their appointment of board By divesting their share (Huntingdon life science)
Stakeholder theory
Developed since 1970s. Freeman postulates the theory of corporate accountability to a broad range of shareholders. Companies acts have affected employees, local community and environment and even to their shareholders there fore their accountability is expected.