Agency theory and fiduciary responsibility

Agency Theory

Agency theory refers to the relationship between a principal and their agent. An agent is employed by a principal to carry out a task on their behalf. 

By accepting to undertake a task on their behalf, an agent becomes accountable to the principal by whom they are employed. This means that the agent must be able to show to the principal that they have been good stewards of the principal's goods. In other words directors must show shareholders that they have managed the shareholders' company correctly. 

Fiduciary Responsibility

Directors also have a fiduciary responsibility to the organisation. In this sense, fiduciary means 'given in trust' which is where the concept of a trustee arises. The directors hold a position of trust because they make contracts on behalf of the company and they control the company’s property. 

The duty is therefore to the company, and not to the shareholders. If the directors breach this duty, then the company will bring legal action against the director. In this sense the 'company' would be the other directors. Where the directors are not willing to act, then a majority of shareholders would have to represent the company. Current company law in the UK indicates that this must a majority, although the Companies Act 2006 may allow actions from a smaller number.