Define agency relationship from the context of a public limited company and briefly explain how this arises.

An agent is an individual or party acting on behalf. In the context of public limited agency relationship may take two main forms.

(i) Agency relationship between Shareholders and Management.

The shareholders are the owners of the company through equity capital contribution. However, they may not be involved in management. The shareholders may not have the necessary skills or time required. As a result, they appoint other parties to run the company on their behalf (managers). The shareholders are the principles and the management constitute the agents.

(ii) Agency relationship between the shareholders and creditors.

The creditors are the contributors of debt capital They are not allowed to be involved in management of the company directly. After provision of funds the shareholders are expected to manage the funds along with the management on behalf of the creditors. The creditors constitute the principles and the shareholders the agents.

The management may be involved in funds and irregularities. This will reduce the net earnings accruing to the shareholders.

(iii) Other agency relationships is between shareholders and government auditors, employees and consumers.

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