Agency is a contractual relationship between two parties, in which one party – the agent – is empowered to act, to make certain decisions, and to make legally-binding agreements on behalf of another party – the principal – subject to the principal’s control. Agents are duty-bound at law to act as fiduciaries for their principals. Agency relationships are ubiquitous features of business because they permit both individuals and companies to conduct business and enter into contractual relationships in many different places at the same time. One powerful way to think of a company or a firm is as a web of agency relationships.
Agency is an important concept in business ethics for a number of reasons. First, agency relationships are frequent sources of conflicts of interest. For example, an agent offered a bribe by a third party to bind the agent’s principal to that third party faces a conflict between her interest in securing payment from the third party and satisfying her duty to act in the best interests of her principal. (In the economics literature, this is referred to as the “agency problem.”) Second, there is sometimes a gap between an agent’s actual authority (as granted by the principal) and the agent’s apparent authority in the eyes of the third parties with whom she deals on the principal’s behalf. Agents may accidentally or intentionally exceed their authority and bind principals to contractual relationships outside their actual authority. Third, because they are fiduciaries, agents are supposed to exercise their authority partially—in favor of their principals. Acting ethically as an agent is less like being a neutral and impartial judge between the principal and third parties and more like being an advocate of the principal’s interests.
See also in CEBE:
- Joseph Heath, “The Uses and Abuses of Agency Theory.” Business Ethics Quarterly, Volume 19, Issue 4, October 2009.
- John Winsor Pratt and Richard Zeckhauser, eds., Principals and Agents: The Structure of Business (Harvard Business School Press, 1985).
- Law of agency (Wikipedia entry).
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