12 January, 2026
For a long time, organizations have struggled with the Principal Agent Problem, and the latest reports for 2024-2025 indicate that annual global corporate fraud is estimated at around $500 Billion.
Let me first explain what does the Principal Agent mean? The Principal is the individual or entity that delegates authority (for example, a shareholder, employer, or voter), while The Agent is the individual or entity authorized to act on the principal’s behalf (such as a manager, employee, politician, real estate agent, or lawyer).
Many corporate governance practices were introduced to address this issue, as a large proportion of fraud cases have historically been committed by internal actors (agents) who often possess more information about the business than the principal (owner).
In the UK, this led to the introduction of the Cadbury Code in the 1990s, which later evolved into the Combined Code on Corporate Governance. In the US, the Sarbanes Oxley Act was introduced in 2002; these practices helped establish governance structures to prevent fraud and protect shareholder wealth.
Since the early development of corporate governance, organizations have progressively introduced stronger internal controls, starting with financial controls and annual reporting mechanisms, then quality and process controls, risk management, IT controls, and, more recently, environmental, social, and cybersecurity responsibilities.
But still the core issue remains, it’s the human and social side of running the organizations. As Mervyn King noted, “Organizations need to practice qualitative corporate governance rather than quantitative governance,” and “You cannot legislate good behavior.”
This quote highlights the need to look beyond rules and compliance that the recent practices of corporate governance couldn’t tackle such as employees’ bad personal behavior and many poor corporate practices that can still be traced back to the Principal Agent Problem, including, but not limited to:
- Poor hiring decisions based on referrals or personal relationships.
- Resistance to new initiatives that could drive the organization’s growth.
- Shutting down creative ideas to avoid additional commitments.
- Not working full contractual hours.
- Misuse of company resources.
At the end senior leaders must actively embed trust, ethical conduct, and positive behaviors within their organizations, especially in the age of AI, where human judgment, collaboration, and soft skills will become even more critical and important for effective execution across organizational boundaries.
