Essay on Corporate Goverance: How to Help with Fraud
2.1.1. Debates of Agency Theory
Relationship of principal and agent can be related to the separation of ownership and control. All agency relationships experiences agency cost, which is a cost arise from many source which include monitoring and bonding costs (Jensen and Meckling 1976), recruitments costs, oppose selection, moral hazard, self-dealing, corruption and self-regulation (Shapiro, 2005). Besides, the agency relationships also cause a number of disadvantages relating to the opportunism or self-interest of the agent. The agent may not act for the best interest of the principal; the agent may misuse his/her power for monetary or other advantages; moral hazard; principals-agents have differences interest and asymmetric information. The view and objective from principal and agent may differ, for example the agent may not take appropriate risk in pursuance of the principal’s interest, idler corporate resource, because they view those risks as in-appropriate (Heat and Norman, 2004).
Jensen and Meckling argue that the interest of principal and agent are always conflict. It will not equally maximize the benefits. The challenge is how to