Agency Theory
The agency theory helps to outline the main interests of both the principal as well as the agent, which includes an individual and their financial planner. The agency theory helps to describe the main problem as they occur when one party is representing the other in business, but they also hold divergent views on several business issues. Their interests are different from the principal. The agent who is acting on behalf of another party can also disagree about the main course of action, and they also allow their personal beliefs to influence the overall outcome of a transaction.
The agent may act in their own self-interest instead of looking after the benefits of the principal, which may result in a conflict between both parties. This kind of conflict might also end up affecting the overall working of an organisation and will turn out to become an agency problem. The agency theory also tends to focus on the interest of the shareholders of an organisation and cater to their needs which is beneficial for the company in the long run.
Stakeholder Theory
The stakeholder theory mainly suggests that there are a number of differences between the individual groups like the investors, employees, and suppliers in any organisation. This theory helps to define the composition of an organisation as a collection of a number of individual groups with differing interests. These interests, when taken together, are a representation of the will of the firm. The business decisions should also consider the interests of these collective groups and also advance the overall levels of cooperation between them as much as possible. Any conflict within these groups is a representation of the erosion of these interests. Even if you can end up bringing these distinct groups together, they may not always reach an agreement. Because of this, all the business decisions must also consider every point of view and also optimise the decision-making process to include all the opinions.
Difference between Agency Theory and Stakeholder Theory
Both the agency and stakeholder theories have been used for the purpose of outlining the interests of employees, shareholders, customers, vendors and the general public. There are a number of challenges that manifest within the corporate world as a result of issues like miscommunication, incomplete information and conflict, which can be tackled using these two theories. However, it must be noted that there are major points of difference between agency theory and stakeholder theory, and we should focus on those points below to get a wider perspective of these two concepts:
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Agency theory helps to describe the main problems that are occurring when one party is representing the other party in business, but they also hold divergent views on several business issues or their interests are different. |
Stakeholder theory helps to define the composition of an organisation as a collection of several individual groups with differing interests. |
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The main focus of the agency theory is primarily towards taking care of the interests and well being of the shareholders. |
The main focus of the stakeholder theory is primarily towards taking care of the interests and well being of all the stakeholders in an organisation. |
Conclusion
There are a number of points of difference between agency theory and stakeholder theory. But both of them perform a very crucial role in the functioning of the financial markets. It then becomes extremely vital that a greater number of corporations are aligned with this theory, and they also help propagate it to other groups. These theories have an important role to play in the development and growth of an organisation, both in the short as well as the long run.
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