Jensen and Meckling

Jensen and Meckling are known for their work on agency theory in finance and economics. They explained the relationship between owners (principals) and managers (agents) of a company. The theory highlights that because managers may have different interests than owners, they might not always act in the owners' best interests. This can lead to inefficiencies, as managers might pursue personal goals over the company’s success. To align these interests, systems need to be established, such as performance-based incentives, ensuring that both parties work towards common objectives, ultimately enhancing overall company performance.