• Institute of Corporate Directors

Blockchain Solution for Agency Problems in Corporate Governance

Jensen and Meckling’s (1976) study on Agency theory is still used today in analyzing the relationships between shareholders, management, and debt holders. Agency theory highlights the relationship between principals and agents. Principals and agents are described as having their own separate interests, but still have to work together with the agent being given a task by their respective principals. The Principal must therefore invest in a structure that overlooks the work being done by the agent so that it is in line with the principals. Agency costs is the sum of monitoring costs, bond costs, and residual loss, which overall negatively impacts the efficiency and trust between stakeholders.

Blockchain eliminates the problem of Agency theory. It greatly reduces agency costs by allocating the monitoring of agents to decentralized artificial intelligence. Principals are able to look at all the transactions being done by agents or the system itself, and can report

irregularities or discrepancies.

Overall, blockchain offers a technological solution to a long-lasting problem in corporate governance. It promotes transparency and trust between principal and agent creating a harmonious relationship between the two.

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