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.

A lot is said and written on how to answer interviews, how to dress up, how to greet and how to answer (all this for the interviewee) but, what about the interviewer? I think that interviewing is a skill which rarely is correctly practiced. I have been on both sides of the table; and having the experience of interviewing some intelligent, friendly, bright, timid, shy, unripe candidates which has really helped me become a better person. As an interviewee, I must mention that I have rarely seen an established, well-mannered, polished and mature interviewer.

The world depends most heavily on the least reliable, yet, most expensive method in hiring employees and that’s the interview technique. It is the most expensive process.  I call it expensive because it begins by inviting the so-called ‘experts’ which is often absurd.  Some of the panelists think no end of them and demand high fees for conducting interviews. Then it all depends on how sincere they are, how enthusiastic they are and whether they are geared competitively to ask questions. Friends, many interviews become a waste of time when wrong people are invited on the panel. Some half-baked experts get intimidated when a bright candidate is better informed and in fact gives the right answers. When the panelists are not well informed, are not really ‘expert’ in the chosen field of interviews their egos get hurt, and they turn out the real suitable candidates from the process of selection. I have seen so far in my life some most callous, unfriendly ‘quacks’ conducting interviews. Thus interviewing is one of the least accurate steps in the selection process.

Another fact is assessing candidates is highly subjective, and is based on whatever assumptions (prejudices) the recruiter and the interview panelists have; there is a mismatch between the mood, and the chemistry between them and the candidate. Even factors such as physical appearance, dressing, tone of voice, or time of day can impact the interview. Please give this a thought – if there are two candidates with same qualifications and experience, one panel turns down one of the candidates, but if that candidate is made to take interview with another panel  he/she has bright chances of getting selected. Please try it, and you might get amazed.

In my opinion written tests are ten times more accurate than interviews. You get all types of computerized tests or you can prepare them depending on the requirement. Through computerized tests you can assess the IQ, EQ, SQ, RQ, compatibility, knowledge of the area all of these and many more factors. The most accurate hiring procedure is use of ability-merged tests that measure aptitude, motivation and competitiveness followed by a trial period, a review of the resume and, of course reference checks and experience etc. But, sadly we all depend heavily on the interview technique. Perhaps, it is because, it allows to gauge a candidate face to face.

Research has consistently shown that the typical unstructured interview is pretty unreliable. It does not consistently ensure that the most qualified person gets a job or that the person will perform any better than another candidate chosen with less care. The validity of choosing candidates by only using an unstructured interview process is about the same as simply picking someone at random. But recruiters and their HR managers love interviews. I suppose they like it because it satisfies their ego, need for power and control; all powers are vested in the interviewer to select a candidate.

Interviews are rarely done consistently; after five or six candidates the panel gets bushed. It becomes a rote question-answer session. After the first two or three candidates the panelists experience the ‘economies of scale’ from interviewer to interviewer or from candidate to candidate. Yet, we typically consider all the interview inputs for a candidate as if they were done in the same way. Therefore we are comparing grapes to apples, and apples to oranges; the hairs we split and the time we spend distressing over a small detail or a particular answer to an interview question is a white wash.

Carefully constructed interviews, where the questions are directly related to measurable skills, competencies, or past experiences, take a lot of time to prepare and, to be most effective, have to be delivered in a similar way to each candidate for the job. It requires lot of detailing and scientific measures. From my experience as a recruiter, I can say it is time consuming and requires real expertise.

What happens when a person is already chosen for a job, and interviews are conducted to ‘show the world’ that the concerned person is chosen through a process? I have experienced some rambling, incoherent, and amorphous interviews which are a sheer waste of time for both – recruiter and candidate. The interviewers look into the resume of the candidate and ask questions randomly ranging from funny questions why something is his hobby and why something else is not his hobby? Or why he left a job, when the candidate starts answering and the panel is weary the candidate is asked to cut short, and is asked to validate something they already expected and wanted to hear. A well-versed, experienced candidate (one who has given many interviews) can game the system in many ways to incline the deck in his favor. No wonder that most candidates often roll their eyes at the absurdity of the interview process.

The mistake most companies make is they are not ready with the checklist while they hire people; they should be prepared with the requisite skill sets for the position – such as enthusiasm, courtesy, honesty, warmth, sincerity etc. Also recruiters need to check attitude, aptitude, social skills, and personality traits. The fact is these are inborn traits and cannot be taught. List the job tasks, along with the qualities, education, experience and training a person needs to do the job. Then it needs logical processing of identifying how to determine whether a person has all of the qualities that has been listed. Reference checks, background investigations and other sources also are equally important.  Compatibility is the most important factor, and the smaller the organization, the more important it is. Compatibility is where most problems occur, and it’s the hardest to check. While hiring a candidate it most important to check whether the applicant shares same values as the organizations’.

A person could have a terrific aptitude for the job, is motivated, has lots of experience, education and training for the job, but if he/she does not fit in with everybody else, the candidate will create problems. He/she will eat up much of management’s time every now and then for trivia. Compatibility can be gauged by comparing applicants’ test results with results obtained from testing an organization’s best and worst existing employees. After short listing the final candidates, ask them to carry out a practical task, such as solving a case study, doing a presentation or preparing a report. This is a great way to show whether their bark is bigger than their bite, in other words if they really do have the goods to deliver. Although the style of their presentation may not fitting, or they might not be polished and astute or they may not exhibit perfect knowledge but look out for that out of box thinking, look out for the attributes to cope in a high pressure situation.

Finally, let me tell you, there are complex reasons for why people do what they do. And a mere interview of some minutes or hour cannot reveal the precision of a person.