Some stakeholders interest is not exclusively monetary. An example of such is Oxfam and Cafe Direct’s initial pursuit of promoting the Fairtrade brand.

The above is not very common, and the working assumption is that the shareholders’ objective is to maximise the wealth via the capital increase of the shares or the dividends. On the other hand, we should hypothesise that managers are more interested in their wealth and work security with the minimum effort possible.

This problem is studied by the “agency theory”, developed by Jensen and Meckling (1976). The theory established that the stakeholders’ relationship, called the principals, and the managers, defined as the agents, is done via a contract. This contract delegates some decision-making authority from the principals to the agents to perform services on behalf of the former.

The agency theory serves as a framework to determine a contract between the principals and agents optimally. It assumes that both parties, the principal and the agents, are individuals in a relationship searching for their own perceived self-interest.

Two common problems in establishing this contract are the asymmetry of information and the inherent uncertainty of the decision processes. The information asymmetry relies on that the information available to the principals and the agents is not the same. The uncertainty consists that the principal is not aware of the agents’ information to base the decisions. The principals do not know the degree to which a situation’s activity outcomes are determined by the agents’ decisions or out of the agents’ control.

The agency theory identifies the problems described above are the reason for two issues: adverse selection and moral hazard.

The adverse selection problem consists of when the agents do not longer make the best decision based on their knowledge but rather what the agents consider to be the best decision in the principal’s eyes.

The second problem is the moral hazards that describe the agents acting in their best interest, regardless of the principal’s optimal benefit, when they know that the principal cannot monitor the actions.