The Agency Problem of the Board of Directors

Abstract

An essay that explores the application of agency theory to corporate boards of directors. I analyze the three-part corporate structure that has become commonplace, consisting of investors, directors, and executives, using agency theory and agency costs as set forth by Jensen and Meckling. I find that boards of directors as agents require their own monitoring and incentives, apart from those of executives as agents, which imposes their own costs on investors as principals. I use the agency theory and agency cost concept to analyze current developments in US corporate governance.