What does agency theory suggest regarding ownership and management?

Agency theory primarily focuses on the relationship between principals (owners) and agents (managers), examining the conflicts that can arise when ownership and management roles are separated. This theory posits that when the owners of a company delegate control to managers, there may be occasions when the interests of the managers do not align with those of the owners. As a result, the owners' wishes and goals can be overlooked or ignored by management, leading to potential inefficiencies or conflicts of interest.

The crux of agency theory is that the separation of ownership and management can create a situation where managers may prioritize their own interests over those of the owners, leading to agency problems. This understanding underscores the importance of establishing governance mechanisms and incentives to align the interests of both parties. Thus, the option accurately reflects the central premise of agency theory, illustrating the principal concern regarding the relationship between ownership and management.