Last modified on July 13, 2016, at 01:08

Agency Cost

Part of the series on
Corporate Players

Board of Directors

Business Forms

Sole Proprietorship
Closely-Held Corp.

Economic Concepts

Agency Cost
Mergers & Acquisitions
Transaction Cost
Horizontal Integration
Vertical Integration

An agency cost refers to the price of securing the trust, cooperation, and accountability of a corporate officer in a corporation. The problem emanates from the Berle/Means hypothesis, which states that, as a corporation diversifies, ownership (by the shareholders) and operation (by the officers) are increasingly separated by distance, responsibilities, and knowledge, a divide which increases the risk of an officers' irresponsibility, and deliberate manipulation of the corporation for personal gain.

The answer is, often, regulation: the Sarbanes-Oxley Act (often referred to as SOX), for example, imposes accountability measures on corporate officers, and requires an independent and strong Board of Directors to look after shareholder interests. Of course, these measures come at increased cost. This is an agency cost, and represents the tradeoff between security, and the cost of security.