Benefit of Research INTRODUCTION

7 many companies still remain unconvinced and to them, “the practical adoption of good governance principles has been “patchy” at best, with “form over substance” of the norm” Bradley, 2004, pp. 8-9. 2.2. Theory Development 2.2.1. Agency Theory Since the publication of Jensen and Mecklings seminal work in 1976, agency theory has become an important part of modern financial economics. It is commonly cited as one of the key areas in the development of modern financial considerations. This principles have been extended provide explanations of merger activity and corporate restructuring, dividend policies, executive compensation, composition of corporate boards, and capital structure, among other issues. Agency theory is the basis of the theory underlying the companys business practices used at this time. The theory develops from the synergy of economic theory, decision theory, sociology, and organizational theory. Main principle of this theory suggested a working relationship between the investor who gives authority and agency who receive authority, called manager. Agency theory has basic roots in economic theory which was exposed by Alchian and Demsetz 1972 and further developed by Jensen and Meckling 1976 who defines as “the relationship between the principles, such as shareholders and agents, such as the company executives and managers”. It defines the firm as a nexus of contracts between different resource suppliers. Two parties are central to the agency theory; principals, who supply capital, and agents, who manage the day to day of the firm’s affairs CBFA, 2000. 8 More formally, Jensen and Meckling 1976 define an agency relationship as a contract under which one or more persons the principals, engage another person the agent, to perform some service on their behalf that involves delegating some decision making authority to the agent. In an organizational context, a firm hires agents in part to exploit economies in specialization. Shareholders who are the owners or principals of the company, hires the gents to perform work. Principals delegate the running of business to the directors or managers, who are the shareholder’s agents Clarke, 2004. Jensen and Meckling assume that the behavior of all parties, both principals and agents, is motivated by self-interest. However, utility of wealth maximization is remains the single human motivator in their entire theory. They have individual goals and perquisites that will sometimes take precedence. Self- interest is defined as maximization of the utility of personal wealth. In making this assumption, Jensen and Meckling make no assertion about its morality. Rather, they simply claim that it is the best descriptor of human motivation. Nevertheless, this assertion generates a great deal of criticism in the literature of financial ethics. Meanwhile, the agency theory developed by Michael Johnson, considers that the companys management as agents for the shareholders, will act with full awareness of their own interest, not as the wise and prudent and also fair to shareholders. Daily et al 2003 argued that two factors can influence the prominence of agency theory. First, the theory is conceptually and simple theory that reduces the corporation of two participants of managers and shareholders. Second, agency