Agency relationships occur when one party, the principal, employs another party, the agent, to perform a task on their behalf.
Modern organisational theory views an organisation as comprising various interest groups often called stakeholders e.g
• shareholders
• management
• other employees
• those charged with governance
• customers
• suppliers
• the government
• lenders of funds
• community organisations,
The relationships between the various stakeholders in a company are often described in terms of agency theory. For example, directors can be seen as the agents of shareholders, employees as the agents of directors and external auditors as agents of shareholders.
Each principal needs to recognise that, although he is employing the agent, the agent will have interests of his own to protect and thus may not fully carry out the requirements of the principal – a conflict of interests may arise.