This paper integrates elements from the theory of agency, the theory o — Principal–agent problem

"Agency theory considers the optimal contract form for that ubiquitous control relationship in which one person, the principal, delegates work to another, the agent... The agency problem is to determine the optimal contract for the agents service. For example, in our earlier vignette of the minicomputer manufacturer, the manufacturing vice-president is the principal and the plant managers are the agents in an agency model of the vignette. Again, in the case of the vignette, the agency problem is to determine the measurement and reward structures for the plant managers such that they appropriately balance concerns for inventory, service, quality, and cost in a context of uncertain demand."

"The relationship of agency is one of the oldest and commonest codified codes of social interaction. We will say that an agency relationship has arisen between two (or more) parties when one, designated as the agent, acts for the other, designated the principal, in a particular domain of decision problems. Examples of agency are universal."

"Agency theory argues that in the modern corporation, in which share ownership is widely held, managerial actions depart from those required to maximise shareholder returns (Berle and Means 1932; Pratt and Zeckhauser 1985). In agency theory terms, the owners are principals and the managers are agents and there is an agency loss which is the extent to which returns to the residual claimants, the owners, fall below what they would be if the principals, the owners, exercised direct control of the corporation (Jensen and Meckling 1976). Agency theory specifies mechanisms which reduce agency loss (Eisenhardt 1989). These include incentive schemes for managers which reward them financially for maximising shareholder interests. Such schemes typically include plans whereby senior executives obtain shares, perhaps at a reduced price, thus aligning financial interests of executives with those of shareholders (Jensen and Meckling 1976). Other similar schemes tie executive compensation and levels of benefits to shareholders returns and have part of executive compensation deferred to the future to reward long-run value maximisation of the corporation and deter short-run executive action which harms corporate value."