agency costs
Agency Costs are the losses a business suffers when the people running it act in their own interest rather than the owner's interest.
In plain English
When you drive your own okada, you manage the fuel like your life depends on it, because it does. Hand that same okada to a hired rider and pay him a flat daily rate, and watch how differently he treats the fuel, the tyres, the small accidents he does not bother to report because it is not his money bleeding away.
That gap between how an owner behaves and how a hired manager behaves is agency costs. It is the price you pay for not being the one behind the wheel.
In a Nigerian company, consider a family business that has grown big enough to hire a professional managing director from outside the family. The MD gets a company car, a generous travel budget, and a team of assistants. Some of that spending genuinely helps the business. Some of it is the MD living well on the owners' money, upgrading to business class for a trip that could have been economy, because the bill lands on the company, not on him.
In the United Kingdom, this is exactly why shareholders in listed companies fuss over executive pay and bonus structures. A chief executive who gets paid the same whether the company doubles its profit or barely breaks even has little reason to push hard. Shareholders design bonus schemes tied to performance precisely to shrink that gap between what is good for the boss and what is good for the owners.
Even diaspora families feel a small version of this. Someone sends ₦500,000 home to a relative to manage a rental property, and pays them a fee regardless of how well the property is kept. If the relative is lazy about finding good tenants or fixing leaks quickly, the family loses rental income they never see, simply because the person managing the asset is not the one who ultimately owns it.
Agency costs never disappear completely. The whole craft of corporate governance, audits, boards, bonus schemes, is really just an ongoing effort to keep this gap as small as it can be.
A company earns ₦200,000,000 in profit a year. Because the managers are not the owners, they spend ₦15,000,000 of that on perks, first class travel, and pet projects that do little for shareholders. That ₦15,000,000 is agency cost, profit lost simply because the people making decisions are not the people who fully bear the consequences.
Questions people ask
Is agency cost the same as fraud?
No. Fraud is deliberate theft or deception. Agency cost can happen even with honest managers, simply because their interests do not perfectly match the owners' interests. A manager choosing comfort over efficiency is not stealing, but it still costs the owners money.
How do companies try to reduce agency costs?
Through things like performance based bonuses, stock options, independent boards, and external audits. The idea is to make the manager's wellbeing depend more directly on the owners' wellbeing, so their choices naturally line up better.
Do small businesses have agency costs too?
Yes, any time an owner is not personally doing every task. A shop owner who hires a sales attendant faces the same issue on a smaller scale, which is why many insist on daily sales records and stock counts, to keep that gap narrow.
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