In the agency relationship, who is considered the principal?

In an agency relationship, the principal is the party that delegates authority to another party, known as the agent, to act on their behalf. In the context of a business, shareholders are considered the principals because they own the company and have the ultimate interest in the firm's performance. They provide the capital and expect the agents, typically managers, to act in their best interests, making decisions that will enhance shareholder value.

Managers (acting as agents) are tasked with making operational decisions and are accountable to the shareholders for their actions. The relationship is fundamentally about trust and responsibility; the shareholders rely on managers to manage the company effectively and make decisions that align with the shareholders' interests.

Employees and customers do not typically hold the same position as principals in an agency relationship. Employees may work under the managers who are the agents; customers interact with businesses but do not have ownership rights and thus do not have the authority to direct the actions of the business.