Agency theory was independently developed by Stephen Ross in economics and Barry Mitnick in institutional management during the mid-1970s. The most cited work, however, is by Michael C. Jensen and William H. Meckling (1976), who formalized the theory by defining agency costs and creating a framework for reducing conflicts of interest between principals (like owners) and agents (like managers).

Agency theory explains the relationship between a principal, who delegates authority, and an agent, who acts on the principal’s behalf. In a corporate setting, the principal is typically the employer or shareholder, while the agent is the manager or executive responsible for running the organization. A manager plays a crucial role by acting as a link between the employees and top management. Their primary responsibility is to provide leadership and guidance to a team or department, ensuring organizational goals are met through efficient planning, organizing, staffing, leading, and controlling of work. Key responsibilities of the manager include:

Setting individual employee goals

Setting individual employee goals is a core responsibility of a manager, but it should be a collaborative process. Managers work with employees to align individual goals with the company’s strategy, provide ongoing feedback, and involve them in goal setting to foster engagement and development. This approach ensures that individual targets not only support team and organizational success but also contribute to the employee’s personal and professional growth. By translating company strategy into clear, relevant, and achievable objectives, managers help employees understand their role in the broader mission and drive meaningful performance.

Delegating tasks effectively

Effectively delegating tasks is a core responsibility of a manager, crucial for optimizing time management, fostering employee development, and enhancing overall team efficiency and productivity. Good delegation goes beyond merely assigning work; it involves strategically selecting tasks, aligning them with the strengths and capabilities of the right team members, providing clear instructions and the necessary resources, and fostering an environment of trust. Additionally, it requires holding individuals accountable for their results while maintaining open lines of communication and providing ongoing support to ensure successful outcomes.

Monitoring and evaluating employee performance

Effectively monitoring and evaluating employees is a core responsibility of a manager, essential for setting clear expectations, identifying areas for improvement, and fostering continuous development and engagement within the team. This process involves setting clear goals, defining specific, measurable, achievable, relevant, and time-bound (SMART) objectives that align individual performance with organizational priorities. Continuously observing employees’ work to assess progress, behavior, and adherence to standards in real time. Maintaining accurate records of performance metrics, achievements, challenges, and behaviors to support objective evaluations. Providing continuous feedback and coaching.

Motivating and inspiring the workforce

Effectively motivating and inspiring employees is a key responsibility of a manager, as their ability to foster a positive work environment, provide clear guidance, and recognize achievements directly influences productivity, engagement, and overall organizational success. Managers can accomplish this by understanding individual employee needs, communicating a compelling vision, setting achievable goals, offering meaningful incentives and development opportunities, delivering constructive feedback, and cultivating a culture of trust and collaboration.

Making critical decisions

Making critical decisions is a central role of a manager, as managers are responsible for choosing the best courses of action to resolve issues, achieve organizational goals, and guide teams. This involves a process of identifying problems, gathering information, analysing options, selecting the best solution, implementing it, and reflecting on the outcome to ensure company growth, effective operations, and overall success. Managers make countless daily decisions, from assigning tasks to managing budgets, all of which impact the organization. Decisions on new strategies, partners, and resource allocation directly influence the company’s growth and competitiveness.

Acting as a communication bridge between employees and top management

A manager acts as a crucial communication bridge between top-level management and their team of employees, ensuring that strategies from above are translated into actionable plans for the team, and that employee feedback, concerns, and performance data are communicated back up to senior leadership. This role involves clarifying expectations, fostering transparency, advocating for team needs, and ensuring smooth communication flow to maintain understanding and alignment within the organization. Managers interpret higher-level business goals and strategies from senior management, transforming them into clear, achievable operating plans and tasks for their employees.  They communicate company policies, objectives, and changes to their team, making sure that employees understand the bigger picture and their role within it.

The principal-agent problem

In agency theory, the principal delegates authority to the agent, focusing on the potential conflicts of interest that may arise when the agent pursues their own self-interest instead of the principal’s. This situation is termed the principal-Agent Problem and is especially relevant in corporate governance, where shareholders (principals) rely on company managers (agents) to run the organization. A major issue in this relationship is passing on few wrong points which is called information asymmetry where the agent has more information about daily operations or specialized knowledge than the principal. This imbalance allows the agent to make decisions that the principal may not fully understand or control, sometimes to the detriment of the principal’s goals.

the agent holds more information than the principal, creating an imbalance of power and understanding. The outcome of such conflicts is known as Agency Loss: the reduction in the principal’s welfare due to the agent’s self-serving actions.

Key Concepts of Agency Theory:

Principal: The party that delegates authority and expects certain tasks to be performed on their behalf. Commonly, this is the shareholder or owner of the business.

Agent: The party entrusted to act on behalf of the principal, typically a company manager, whose duty is to make decisions that serve the principal’s best interests.

Principal-Agent Problem: The core conflict where the agent’s personal incentives do not align with the principal’s objectives, leading to potentially harmful decisions.

Information Asymmetry: A situation where the agent holds more information than the principal, creating an imbalance of power and understanding.

Agency Loss: The welfare reduction suffered by the principal when the agent’s decisions diverge from the principal’s best interest.

While Nestle India the big food maker is battling its biggest crisis in India, it has asked its employees and all their families and friends to become “valued brand ambassadors” for the company in midst of the company’s battle regarding discussions in the public domain on monosodium glutamate (MSG) in Maggi. In an email to employees, chairman and managing director Etienne Benet, a Swiss-French national who is hardly seen in public, said their role “at times like this is more important than ever……”

The point is why only in crisis, even in peaceful times a company can rely strongly on their loyal and engaged employees instead of hiring expensive brand ambassadors for image building. If a company wants to get extraordinary loyalty from its employees, it needs to take initiative in creating a mutual sense of that relationship. After all, engaged employees build stronger brands. No two thoughts on it.

Though, most companies focus all their branding efforts on marketing activities such as advertising campaigns, corporate communication, attractive packaging etc, yet one of the most powerful assets a company has is – its people. This is regardless of which industry the company is in, for building a strong brand requires that all employees feel connected to the corporate brand and understand their role in turning brand aspirations into reality. The earlier this is understood, it is better for the company. It should aspire to motivate its talent pool into turning brand ambassadors for its business health because employees rank higher in public trust than a firm’s PR department, CEO, board of directors or Founder. Employees are the most credible source of information regarding the organization. The frontline staffs give a glimpse of the organization’s culture and integrity. When a customer interacts with one of the frontline employees, or with the work produced by behind-the-scenes employees, everything the company’s PR and marketing departments have done will be put to the test immediately.

To build a strong corporate brand, the company must invest in its employees who are thoroughly engaged, connected and committed. Scarlett Surveys is the global provider of the best-practice AER Employee Engagement Survey System used by hundreds of organizations to intelligently manage employee engagement.

Scarlett Surveys International defines Employee Engagement as “a measurable degree of an employee’s positive or negative emotional attachment to their job, colleagues and organization that profoundly influences their willingness to learn and perform at work.”

This is where leadership comes into picture. The leaders must lead by stetting examples and embody promises made. When customers deal with an organization, they deal with a mix of employees from various ranks and cadre. A customer anticipates doing business with a company only when the employees look confident, happy and positive.

Attrition is not good for any company’s health. If a high number of employees are leaving then something is wrong; the question is what, and what can be done to improve it. Organizations must foster good work atmosphere because employees who genuinely love, enjoy, and feel connected to their jobs are the ones who best represent the company they work for.  I hope this makes sense, doesn’t it? You will see those employees are the most engaged, the ones who like coming into work every day and are the most likely to say positive things about your company on social media. This is why it’s important to leverage these engaged employees as ambassadors for a company’s brand.

However, in the age of social media, nothing is hidden; hence, it’s not uncommon to see employees badmouthing their organizations – sometimes subtly and sometimes openly. So why do loyal and engaged employees make the very best brand ambassadors? Quite simply, the visibility that engaged employees offer when talking publicly about the brand they represent is something that can’t be imitated emotionally and genuinely by best of the hired models or any outside source. Consumers can tell when employees are being sincere about their passion for what they do and for their company.

Engaged employees sincerely love the company they work for so they are more likely to spread that love on social media. They can organically increase brand awareness on social by sharing news and updates with their friends, fans, and family. They love their company brands so much that they can easily answer customer questions and comments on social, acting as your first line of communication. They provide a relevant, human face for the company they work for, and hence, they can create authentic, compelling content that drives traffic and increases social engagement.

At Starbucks at a point in time, some of their executives visited their coffee shops and noticed that good employees were losing their poise when faced with agitated customers. Instead of coming down on the individual employees, they developed new training material that eliminated the stress of these situations. The executives at Starbucks found that when they empowered their employees with tools they needed to serve customers happily, their employees gained their smiles back.

Do you know friends that Eastman Kodak is one such company in world which has the longest average tenure for employees at 20 years?  This Centurion old company gives the excitement of a strong core business and brand that is recognized and respected in virtually every country around the world. It enables its employees an effective organization, with strong leaders, engaged employees and winning culture.

The key to employee engagement lies in providing growth opportunities, varied roles and empowerment. In India, ITC is one such organization, in which, its senior executives hardly ever quit. Attrition at senior levels is less than five per cent and for frontline staff around 10 per cent. Naturally, ITC and its Agro Tech rarely hire from outside, preferring to promote insiders. ITC also backs employee initiatives. The company allows people to incubate businesses. The team in charge of the paper business suggested getting into greeting cards. A few years later they realised they were not getting anywhere and came back with a proposal to enter office stationery. The company placed a second bet on them. This time it hit the jackpot. In four years, office stationery has grown into Rs 500-crore business for ITC.

A great company culture breeds happy people. Those happy people who connect with their roles and the company become engaged employees. Let us not underestimate role of each employee in an organization from the sweeper to the CEO each one has a big role to play.

Organization must deliver the promise to employees. “When employees feel that the company takes their interest to heart, and then the employees will take company interests to heart,” says Dr. Nelson, a clinical psychologist, bestselling author and business trial consultant. She mentions in her book an example: in 2011 after wrapping up a record-setting year, new Apple Inc. CEO Tim Cook rewarded employees by giving them paid vacation through the week of Thanksgiving. In a memo to employees Cook wrote, “In recognition of the hard work you’ve put in this year, we’re going to take some extra time off for Thanksgiving. We will shut down with pay on November 21, 22 and 23 so our teams can spend the entire week with their families and friends.” This act of Cook motivated the employees to no limit.

Similarly, Proctor & Gamble also pays back company success to employees through extra paid days off. “It ate a little bit of their bottom line, a little bit from the stockholders, but oh my God what it bought them in employee loyalty and productivity,” says Dr. Nelson. She writes “If you’re doing well, share. And for God sake, don’t let your executives walk out with a bonus if the company is not doing well. People don’t mind that execs make money, they mind if it’s exorbitant if the company is not doing well.” She says in her book that even when the company is not doing well the information should be shared with its employees. Employees accept realities than being kept in dark.

Make your employees your brand ambassadors.

Frederic Winslow Taylor, (1856-1915) was the first person who attempted to systematically analyze human behavior at work place. He compared the organization to a machine form; the machine with its low-priced, interchangeable parts, each of which does one specific function. Taylor said organizations are like big machines because humans working in an organization can be easily molded and can be transposable.

Like in a family or in a society, even in organizations, individuals and groups interact on different matters for the harmony and prosperity. The combined behaviors create a company climate that can reinforce or depress an organization’s success. Each individual and his behavior matters because business processes are interdependent. Therefore, while working from within a company’s structure, both management and staff might have difficulty in recognizing patterns of behavior and also how intensely those patterns can influence a company’s performance. The leadership is extremely important to create positive influence and positive atmosphere by helping the employees to grasp and work on achieving mission, vision and goals of the organization; this is where OB is important. Every person working in an organization from the gate keeper, sweeper to the CEO is involved in the company’s future. If the internal atmosphere is good in an organization, it projects a strong external manifestation.

OB relies heavily on social sciences and psychology. When an individual joins an organization he is concerned with his personal growth. But his interpersonal relations are important for the organizational competence and in return the group dynamics. The individual’s behavior is thus very important from the organization’s perspective. If the individual speaks good of his organization outside, it showcases the cultural strength of the organization. People are the key to an organization’s survival.

The importance of organizational behavior rests in understanding how individuals, groups, and organizational structures interact and affect one another. OB studies, examines communication patterns between individuals and groups, as well as the structure and culture of organizations. Many culturally and financially weak individuals have blossomed and grown after joining good workplaces. A detailed look at workplace behavior, business culture, and organizational practices generates greater insights about communication patterns and conflicts. People can make work place an exciting, fun-filled, and productive place to be, or they can make it a routine, boring, and ineffective place where everyone is apprehensive and tense. Steve Jobs, cofounder, chairman, and CEO of Apple Inc. attributed the innovations at Apple, which includes the iPod, MacBook, and iPhone, to people, noting, “Innovation has nothing to do with how many R&D dollars you have.…It’s not about money. It’s about the people you have, how you’re led, and how much you get it.” 

Such conclusions sometimes spark solution-oriented policies and organizational change, causing leaders to implement rewards systems, new communication techniques, or innovative management approaches. Learning and revising the ways in which individuals and groups in an organization interact is often very helpful. Lot of factors challenge the system: culture of the nation, infrastructural facilities, demographics, educational standards in the nation, and few other factors are critical for explaining challenges within an organization.

Apple is known for its innovative products and sleek designs. The company is also known for offering tech products at higher price points than its competitors, but consumers still line up to buy new products or purchase upgraded versions of existing products. Apple corporate culture is built on innovation, but critics report that the executives push their employees hard and expect nothing less than the best from them. The company’s focus on creating seamless consumer technology has allowed it to prosper even when other tech companies have experienced declines in sales.

Another reality is that employees fear any change in an organization. Employees are often reluctant to embrace a new technology, new posting, new process, new boss, new colleagues – they have an aversion to something new. Change which cannot be avoided under any circumstance interferes with an organization’s advancement efforts. This is where OB becomes more important. Organizational behavior in such a situation as in adopting change highlights the capable leadership from top in effectively managing fear of change across the organization. When changes take place, managing individuals and groups are important.

Organizational culture is a system of shared values, beliefs, and assumptions that governs the behavior of people in the organization. The culture of an organization is determined by the values placed on a set of characteristics, such as risk taking ability, ethical governance and appreciation of good employees in detail. When jointly there is a high level of agreement and commitment among the members of an organization on preserving these values, the organization is said to have a strong culture. An organization in which members do not agree and are not committed to the core values has a weak culture.

Mary Kay Ash, founder of Mary Kay Inc., a billion-dollar cosmetics company, makes a similar point, saying, “People are definitely a company’s greatest asset. It doesn’t make any difference whether the product is cars or cosmetics. A company is only as good as the people it keeps.” Just like people, organizations come in many shapes and sizes.

The concern for ethical decision-making is key attribute among the regulators, employees, social groups and managers. It has substantially increased since failure of some of the prominent business organizations like, Satyam, Shell and Enron owing to strong social criticism of some of their business practices. Of late, prominent institutes like IIMs have now begun sensitizing students about business ethics and morality; eminent personalities like the Sri. Sri. Ravishnkar, Jaggi Vasudev or the Dalai Lama is invited to speak on business ethics and ethical behavior. A few imperative literature review shows that authors have frequently used ethics, morality and values interchangeably in the context of organizational behavior. But, this requires sufficient research to examine the linkage of ethical decision-making with organizational structure and business results.

While hiring people some organization go too far examining their cultures and behaviors. They check a list of desired attitudes and behavior before hiring employees. As far as possible they avoid hiring the wrong people, so that they can improve employee satisfaction and reduce employee turnover. Google is one such organization every industrialist might consider emulating, especially if the business is involved in the technology field. The company has an informal product development process and gives staff members access to the co-founders and chief executive.

They create a situation in an interview trying to confirm what they think of a candidate; psychologists call this confirmation bias.  Confirmation bias is the tendency to search, interpret, or prioritize information in a way that confirms one’s beliefs. A lot of scientific assessment goes in choosing the right candidate by hunting for evidence that confirms the panel’s initial impression.

Finally, much of what a manager does has to do with trying to get people to work as effectively as possible.  It involves trying to motivate each individual worker. Much of management has to do with understanding people and how they work.  Therefore, having an understanding of organizational behavior is vital to managers.

Each person has an inherent need to understand and envisage his role and his interaction with others in the organization because much of each individual’s time is spent working in or around a group of people in organization. People differ in their personalities, attitudes, and values, and an understanding of an individual’s personality is extremely important in maximizing his happiness and productivity at work. Organization Behavior theories are particularly helpful in satisfying people’s innate drives at the same time simultaneously using their strengths to accomplish vision, mission and goals of the organization. OB helps in creating a healthy work environment where individuals and organization grow concurrently.

Communication is the foundation of all human interaction. We speak to so many people every day. With our relatives, employees, employers, neighbours, peers, grocer and so many more. It’s of great significance to us to carry out minimal adjustments within the method in which we converse with each one, depending on what the transaction is. While interacting with others don’t we all try to make our communication more efficient and effective?  It’s worth learning how one specific phrase of assistance, one specific declaration of apology, just one mild touch or maybe just one laugh can effortlessly enhance our relations with others.

Frequently, we communicate our unconscious feelings, our profound requirements as well as our inner desires verbally or non-verbally. We certainly would not like our feelings and words misjudged or misinterpreted. It’s therefore very important to take control of what we are sharing with other people. We should make sure that we do not hand out the incorrect information. Though this is gospel truth, rumour-mongers are there everywhere and they are busy running their rumour mills.

There are two types of communication – formal and informal. Informal communication is also known as grapevine communication because there is no definite direction of communication for sharing information. In this form of communication, information congregates a long way by passing from one person to another person leaving no indication from which point it started. The term grapevine can be traced to civil war days when vine like telegraph wires were strung from tree to tree across battlefields and used by Army Intelligence. The messages that came over these lines were often so confusing or inaccurate that soon any rumour was said to come from the grapevine. Precisely that’s what happens in grapevine – we don’t understand from where the rumour comes and where it would end. Grapevine stretches throughout the organization in all directions irrespective of the authority levels. Man as we know is a social animal. Despite existence of formal channels in an organization, the informal channels tend to develop when people aimlessly interact with other people. It exists more at lower levels of organization.

Grapevine commonly develops in organization due to a variety of reasons. One of them is that when an organization is facing slump, the employees sense uncertainty. Also, at times employees do not have self-confidence due to which they form unions. Sometimes the managers show privileged treatment and favor some employees giving a segregated feeling to other employees. Thus, when employees sense a need to exchange their views, they go for grapevine network as they cannot use the formal channel of communication in that case. Generally during lunch breaks and tea breaks in cafeteria, the subordinates talk about their superior’s attitude and behavior and exchange views with their peers. They discuss rumours about promotion and transfer of other employees. Thus, grapevine spreads like fire and it is not easy to trace the cause of such communication at times. People badmouth others on account of jealousy, insecurity, anxiety, or nervousness and sometimes even due to stupidest reasons.

Social media and social software have become an integral part of the post digital business landscape and they are the breeding grounds of the grapevine. Do you know it is an important medium for communicating with customers, increasing brand awareness, and promoting innovation and collaboration among employees? Social business is typically viewed as a tool for external-facing activities, and is considered particularly useful for managing customer relationships. Increasingly, its relevance to innovation and competitive differentiation is also being recognized. At the same time many companies consider social media as a barrier because they consider it risky.

According to a 2012 survey of 192 executives conducted by Deloitte & Touché and Forbes Insights, social media was identified as the fourth largest risk, placing it on par with financial risk as numerous corporate social media debacles over the last few years have brought attention to the phenomenon of brand sabotage due to compliance and legal risks arising from potential violations of or non-conformance with laws, rules, regulations, prescribed practices, internal policies and procedures. There are no ethical standards; information leakage happens because of friendliness of social media which allows employees to speak to broad audiences and insufficient controls could lead to the disclosure of sensitive information, such as personal accounts, health information, intellectual property, customer data, personally identifiable information, etc. Information leakage may result in loss of competitive advantage and brand damage. Outsourcing social media activities can expose companies to substantial risks, particularly copyright and trademark infringement and lack of governance.

The marketing manager and two supervisors of operation department play tennis every day, and they spend time together in tennis court, there are high chances of exchange of official information through this informal set-up. Another example is the finance manager discloses business development plans during a trek to one of his old school friend who in turn passes on the information innocently to his friend in the rival organization.

But then there are some advantages of grapevine they are: grapevine channels carry information rapidly. As soon as an employee gets to know some confidential information, he becomes inquisitive and passes the details then to his closest friend who in turn passes it his best friend and that one passes to other. Thus, it spreads hurriedly. The managers get to know the reactions of their subordinates on their policies. Thus, the feedback obtained is quick compared to formal channel of communication. The grapevine creates a sense of unity among the employees who share and discuss their views with each other. Thus, grapevine helps in developing group cohesiveness. Also, the grapevine serves as an emotional supportive value. However, the grapevine is a supplement in those cases where formal communication does not work.

Thus, the grapevine is useful as a supplement to formal channels of communication. It often travels more quickly than other channels and is usually more direct. The grapevine is present within all levels of staff. It exists because of a natural desire to know things and brings a sense of belonging to employees and managerial staff alike. It can create corporate identity and build teamwork.

The disadvantages are: The grapevine carries only partial information at times as it is more based on rumours. Thus, it does not clearly depict the complete state of affairs. The grapevine is not dependable always as it does not follows official path of communication and is spread more by gossips and unsupervised report. It kills the productivity of employees as they spend more time talking rather than working. The grapevine leads to making hostility against the executives. It hampers the goodwill of the organization as it may carry false negative information about the high level people of the organization. Therefore organizations should take care of all the disadvantages of the grapevine and try to minimize them. It is also humanly impossible to curb grapevine completely, hence we need to live with them by ignoring it as much as possible.  The blatant fact is that gossiping is a universal pastime.