Managerial Theories of the Firm in context to Nepal

Agency Theory:
Agency Theory explains how to best organize relationships in which one party determines the work
while another party does the work. In this relationship, the principal hires an agent to do the work,
or to perform a task the principal is unable or unwilling to do. For example, in corporations, the
principals are the shareholders of a company, delegating to the agent i.e. the management of the
company, to perform tasks on their behalf. Agency theory assumes both the principal and the agent
are motivated by self-interest. This assumption of self-interest dooms agency theory to inevitable
inherent conflicts. Thus, if both parties are motivated by self-interest, agents are likely to pursue
self-interested objectives that deviate and even conflict with the goals of the principal. Yet, agents
are supposed to act in the sole interest of their principals.
To determine when an agent does (and does not) act in their principals interest, the standard of
Agency Loss has become commonly used. Agency loss is the difference between the best
possible outcome for the principal and the consequences of the acts of the agent. For instance,
when an agent acts consistently with the principals interests, agency loss is zero. The more an
agents acts deviate from the principals interests, the more agency loss increases. When an agent
acts entirely in her own self interest, against the interest of the principal, then agency loss becomes
high.
Research on agency theory shows that agency loss is minimized when two particular statements are
true.
The first is that the principal and the agent share common interests. Essentially, this means that
both the principal and the agent desire the same outcome.
The second is that the principal is knowledgeable about the consequences of the agents activities.
In other words, the principal knows whether their agents actions serve in the principals best
interest. If either of these statements is false, it follows that agency loss is therefore, likely to arise.
One objection to agency theory is that it relies on an assumption of self-interested agents who seek
to maximize personal economic wealth. The challenge is therefore, to get agents to either set aside
their self-interest, or work in a way in which they may maximize their personal wealth while still
maximizing the wealth of the principal. Thus, a standard of agency duty and action is necessary, not
because agents are universally selfish, but because the potential for differences between the
principals and the agents interests exists.
In agency relationships the agent has a moral responsibility for her actions, which she cannot

dismiss simply because she acts as an agent for another.

If we look at the Nepalese market today, we can find enormous firms in every sector who have
taken up agencies of big multinational companies. For e.g. Toyota, Hyundai, Honda in the
automobile sector. Dell, Sony, Samsung in the computer & electronics segment. Godrej, Procter &
Gamble, Nestle, Cadbury in the FMCG segment.
Taking up agencies of such huge multinational companies is both beneficial for the agent as well as
the principal company. It is difficult for the principal to operate everywhere as it increases their
cost, but if they appoint an agent in the country they are creating employment as well as creating
their presence in the market. The reason for existence of such agencies is because both the principal
and agent share common interests. Whereas not all companies can survive in the market as the
Nepalese market is a small market. Stiff competition also is a huge factor as to why companies fail
to succeed in the market.
But it is not always the case that the agent functions keeping in mind the interest of the principal,
hence conflicts arise between the principal and the agent. Leading to either termination of the
agency agreement between them if a solution is not reached.
Taking an example of Fuji Films, the agency here in Nepal first belonged to Goenka International
but Triveni Group acquired the agency as the principal company had conflicts with the previous
agent. There are many companies whose agencies have been taken over by big business house due
to conflicts arising between the principal and the agent or due to manipulation. Naming a few such
takeovers:

Vishal Group has acquired the agency for Suzuki Bikes in Nepal, which was previously

owned by some other group.

Generation-Next has acquired the agency for Apple, which was previously owned by some
other group.

Therefore we can see that this theory is in practice in Nepal and is usually in practice in most of the
countries worldwide.