In objectives, such as planning to maximize profit

In the Monarch case, agency theory was applied through an principal agent relationship problem. The presence of an agency problem is caused by divergent interests and risk preferences between two parties which create a managerial problem, instead of the efficient outcome of each acting in the best interest of the other. A principal agent relationship which is efficient e.g. the same risk preferences and objectives, should exhibit an efficient organisation of information symmetry and risk bearing costs. Differing objectives, such as planning to maximize profit in the event of failure of Monarch (agent) and an increasing risk tolerance by Greybull (principal), were identified as problems within the organisation. This can be seen as an inefficient organisation caused by an agency problem. These were identified applying agency theory because it assumes that humans act in self interest Jensen (1994), and not in the sole interest of the other party. Greybull’s self interest was that, Monarch would be more profitable in administration instead of continuing to operate in the market with financial difficulty. This is the major agency difficulty, the challenge of ensuring that the parties involved act with the same set of objectives and risk preferences rather than behaving in their own self interest. The organisational assumption of this theory, information asymmetry exists between parties, was applied to show a level of distrust between Greybull and Monarch.Contracting and monitoring, assuming that information must be a purchasable commodity (Eisenhardt 1989), were two solutions suggested to mitigate this managerial problem between Greybull and Monarch. Applying these to the real world situations would help to align the interests of the parties and thus reduce information asymmetry. Solutions to an agency problem have an anticipated outcome that alters the behaviour of people and seeks to partially diminish self interest, through behavioural remedies and incentives. In reality solutions are only feasible to Monarch case if the transaction costs of implementation of the solutions are less than the original agency costs.Analysis of TheoryAgency theory is a useful framework for designing governance and controls within organisations. Ross (1983) writes that agency theory is prevalent throughout contractual arrangements. Since it is prevalent in contractual arrangements, its assumptions and solutions help to provide a guidance map to a organisation seeking to deal with information asymmetrybetween various actors. Sappington (1991, pp. 64) concludes that using this theory helps in “identifying some possible sources of friction within organizations and in exploring efficient ways to mitigate these friction.” Applying the theory to the real world seeks to identify and understand accountability of a particular problem within the organisation by acting as a diagnostic tool. In the case of Monarch, the theory shows Greybull as the accountable party causing the problem. Once accountability is analysed, agency theory is effective to organisations in providing guidance on how to change certain boundaries by altering the structure of contracts to incentivise cooperation. Indeed, in recent times Chief Executive Officer’s pay has been linked to performance incentives within a contract in the hope of aligning objectives and behaviour with shareholder preferences. This can be seen as exhibiting a governance system underlined by agency theory. This displays how agency theory identifies accountability and subsequently guides organisations into providing incentives to encourage cooperation.Agency theory has also be influential in terms of how organisations view and invest in, information systems. Eisenhardt’s (1989) paper assumes information is a commodity because it can be bought and sold by the parties. This assumption has been debated on, centring on whether information is a commodity as suggested or a social good. If information cannot be purchased, solutions such as contracting and monitoring would be deemed ineffectual as it relies on this assumption and the existence of information asymmetry would still be present. The report of Arrow (2013) shows that information is in itself an economic commodity as it is scarce and valuable. Thus since information can be purchased, it can be used to alter the other parties behaviour and solve the problem. Therefore agency theory has been effective in how organisational thinking has evolved in terms of information systems. The theory suggests investing in information systems will reduce the significance of monopoly power that the information holder has and strike a balance between the parties. This is why monitoring was suggested in the Monarch case study as improving information systems leads to a reduction of the asymmetry between the two parties.The assumption of agency theory is that undesirable behaviours and the impact of these, as a result of maximising welfare through self interest, can be manipulated and controlled through various solutions by purchasing information through a contract. This limits the theory because proposed solutions are only feasible if the principal or agent are motivated by financial gain, as the party that possesses the relevant information should be willing to sell in order to gain financially within the confinements of a contract. The Monarch case shows the unwillingness of Greybull to even attempt to change their behaviour. Jensen (1994) suggests situations in which monetary incentives are required, they are needed because of people being motivated by things beyond money. In the real world, solutions such as contracting may be suboptimal as they onlyincentivise financial gain; an agent could have other various motivations not just solely financial but non monetary factors, such as cultural or social aspects. The failure to recognize differing motivations limits agency theory by only allowing problems to be solved through a contractual basis, which provides no opportunity to incorporate external factors in other contexts.Furthermore, solutions for an agency problem translate into being cautious and against opportunistic behaviour which can result from self interest. This caution can lead to stifled creativity, entrepreneurship and innovation within organisations, an economic cost that is somewhat ignored by applying agency theory in real life (Davis et al 1997).Agency theory can be seen to better understand the dynamics of the Monarch case, by analysing accountability and highlighting the importance of an efficient information system within a organisation. However in situations where there are non monetary motivations for a human, agency theory limits itself by confiding itself to solving through a contract which cannot include social or cultural aspects.