Every business has its own way of running it. Some founders directly manage the business. And some others hand it over to a second party to take care of all interests or other matters.
Forming an agency is one way to manage a company. The following will explain in more detail the agency theory.
Agency concept
In the Big Indonesian Dictionary (KBBI), an agency is defined as an agent’s office; companies that are interested in business activities; government administrative division. Agency can also be formulated as the capacity and ability possessed by the agent as a source of action.
Melanisr from the id.wikipedia.org page, agency can also be seen as an element belonging to an agent with the capacity to carry out actual actions. The concept of agency is not only an explanation of an action that may be carried out by humans. However, it also serves as an explanation of the dynamics between individuals or agents and social structures.
In particular, about individual relationships and social structure. In general, the concept of agency is applied to explain the ability of individual consciousness to organize its own consciousness. As well as, explaining the capacity of individuals to act independently and free from structural determination.
As a topic of sociology, the concept of agency is described as one of the main problems in social theory, namely the autonomy of individual action. On the one hand, there is a structuralist functional view that tends to downplay the role of individual freedom. As well as, positioning it only as an officer who runs it according to the structure passively.
On the other hand, there is an ethnomethodological view that values social structure as a problem that can be solved and shaped by individuals. Therefore, it has no determination over individuals.
There have been many attempts by sociologists to reconcile the tensions between these approaches. However, a balanced compromise is difficult to find and many sociologists end up favoring one approach over the other.
Definition of Agency Theory ( Agency Theory )
Agency theory ( agency theory ) is a relationship between two parties, the first party occupies the position as owner ( principal ) and the second party as management ( agent ). Agency theory explains that if there is a separation between the owner as the principal.
Second, managers as agents who run the company will arise agency problems. Because, each of these parties will always try to maximize its utility function.
According to Jensen and Meckling (1976), agency theory is a design that explains contextual relationships between principals and agents, namely between two or more people, a group or organization. The principal is the party entitled to make a decision for the future of the company and gives responsibility to another party (agent).
In the hospitality business, the CEO is the principal and the business unit manager is the agent. Thus a lot happens in agency theory, where the age will know and understand the situation of the company/organization so that it can cause information asymmetry which can trigger principal actions that are unable to determine whether the business carried out by the agent is truly optimal.
However, with the development of a company that is getting bigger, it results in frequent conflicts between owners and management, in this case shareholders (investors) and agents represented by management (directors).
The agent is contracted through certain tasks for the principal and has responsibilities or duties assigned by the principal. The principal has an obligation, namely to provide compensation to the agent for the services that have been provided by the agent.
The difference in interests between management ( agent ) and the principal can lead to agency conflicts. Gene fund principals both want big profits. Principals and agents are equally risk averse.
Separate ownership and courts within a company are one of the factors that trigger conflicts of interest which can be referred to as agency conflicts ( agency theory ).
Agency conflicts can occur between parties who have different interests and goals which will complicate and hinder companies from achieving positive performance so as to generate value for the company itself and also as shareholders.
From some of the definitions above, it can be concluded that agency theory is a theory that arises between two parties, namely owners and management. These two parties have different goals.
The owner wants the maximum profit. Meanwhile, the management wants the maximum bonus. Thus, these two parties will always be in conflict because of differences in goals.
Agency Relations
When two or more parties carry out an agency relationship, they will have three possible agency relationships that have been formulated by Ghozali and Chariri as follows.
- Between shareholders (owners) and management, if management owns fewer shares than other companies, managers will tend to report higher or conservative earnings.
- Between management and creditors, management tends to report higher earnings because creditors generally assume that companies with high profits will pay off debt and interest on the due date.
- Between management and government, managers tend to report their earnings conservatively. This is due to avoid tighter supervision from the government, securities analysts and other interested parties. In general, large companies are burdened by several consequences.
The concept of Corporate Governance
According to Nurnyaman, corporate governance is one of the key elements to increase economic efficiency. Among them are a series of relationships between company management, the board of commissioners, shareholders and other stakeholders .
Corporate governance is a concept based on agency theory. The hope is that it can serve as a tool to provide confidence to investors about receiving a return on the funds that have been invested.
Meanwhile, corporate governance itself is a concept proposed to improve company performance through supervision and monitoring of management performance and ensuring management accountability to stakeholders based on the regulatory framework.
Meanwhile, according to the Forum of Corporate Governance in Indonesia, corporate governance is a set of regulations that determine the relationship between shareholders, administrators or managers, creditors, companies, employees, government, and parties who hold shares.
The system that is run is adjusted to the company’s arrangements and controls prepared by these parties. simply put, shareholders with internal and external interests are related to each other through the rights and obligations that they have to live out.
Meanwhile, the World Bank ( World Bank ) formulates good corporate governance as a collection of laws, regulations and rules that must be met. In order to encourage the performance of the company’s resources to function efficiently in order to generate long-term economic value relating to shareholders and the surrounding community as a whole.
Corporate Governance Principles
The Organization for Economic Co-Operation and Development (OECD) formulates four important elements in corporate governance as follows.
1. Justice ( Fairness)
Ensure the protection of the rights of shareholders, including the rights of minority shareholders and foreign shareholders, as well as ensure the implementation of commitments with investors.
2. Transparency ( Transparency)
Requiring information that is open, timely, clear and comparable concerning the financial situation, company management and company ownership.
3. Accountability _
Explain roles and responsibilities, as well as support efforts to ensure balancing the interests of management and shareholders as supervised by the Board of Commissioners.
4. Accountability ( Responsibility )
Ensuring compliance with applicable rules and regulations as a reflection of adherence to social values.
Meanwhile, the principles of corporate governance formulated by the Organization for Economic Co-Operation and Development (OECD) are as follows.
1. Protection of Shareholders’ Rights
The rights of shareholders are the provision of correct, correct and timely information regarding companies that participate in making decisions regarding fundamental changes in the company and obtain a share of the company’s profits.
2. Equal Treatment of Shareholders
Equal treatment of shareholders, especially minority shareholders and foreign shareholders in terms of information disclosure.
3. The Role of All Stakeholders in Corporate Governance
The role of shareholders must be recognized as stipulated by law and active cooperation between the company and stakeholders in achieving company goals.
4. Openness and Transparency
Accurate and timely disclosure as well as transparency regarding all matters related to company performance, ownership and stakeholders.
5. Accountability of the Board of Commissioners
The framework built into corporate governance must guarantee the company’s strategic guidelines, effective oversight of management by the board of commissioners, and accountability of the board of commissioners to the company and shareholders.
Corporate Governance Objectives
Wardani also formulates the application of the principles of good corporate governance concretely has the following objectives for the company.
- Facilitate access to domestic and foreign investment.
- Get a cheaper cost of capital .
- Providing better decisions in improving the company’s economic performance
- Increasing the confidence and trust of stakeholders in the company.
- Protect directors and commissioners from lawsuits.
Meanwhile, according to FCGI, the purpose of corporate governance is to create added value for all interested parties. Following are the objectives of the intended corporate governance .
- Manage the relationships between shareholders, the board of commissioners and the board of directors.
- Prevent significant mistakes in corporate strategy. A corporation is a mechanism built so that various parties can contribute in the form of capital, expertise and labor, for mutual benefit.
- Ensuring that errors that occur can be corrected immediately. The capital market industry has developed.
Corporate Governance Mechanism
Mechanism is a systemic way of working to give effect to certain requirements. The corporate governance mechanism is formulated as a procedure and a clear relationship between the party making decisions and the party exercising control or oversight of the decision.
Management actions must be aligned with the interests of stakeholders. The following is the corporate governance mechanism formulated by Herawaty.
1. Internal Mechanisms
Internal mechanisms ( internal mechanisme ) is a way to control the company by implementing internal structures and processes. For example the composition of the board of directors or commissioners, managerial ownership and executive compensation.
2. External Mechanisms
External mechanism ( external mechanism ) is a way to exert influence on the company other than by implementing internal mechanisms. For example, by controlling the market and debt financing levels, investors, public accountants, and legal regulations.