Agency Costs in Australia: Investor Guide 2025

Agency costs might sound like an abstract accounting concept, but they play a surprisingly real role in the fortunes of Australian investors and businesses. As the 2025 regulatory landscape tightens and corporate governance gets more attention, understanding agency costs is essential for anyone with a stake in the market—from mum-and-dad investors to boardroom executives.

What Are Agency Costs?

At its core, agency costs arise whenever there’s a disconnect between the interests of a principal (such as a shareholder) and their agent (like a company director or manager). In theory, managers should always act in the best interests of the owners, but in practice, their personal goals and incentives can diverge. This misalignment leads to costs—either in the form of lost value, oversight expenses, or missed opportunities.

• Direct agency costs: Expenses incurred to monitor or control management (e.g., audits, compliance committees).

• Indirect agency costs: Value lost when managers don’t act in shareholders’ best interests (e.g., passing up profitable projects to avoid risk).

In Australia, the issue has come into sharper focus as investment funds grow larger and more diverse, and as superannuation plays a bigger role in the economy. With more ‘outsider’ ownership, the potential for agency conflicts rises.

Agency Costs in the 2025 Australian Landscape

This year, several policy shifts and market forces are putting agency costs front and centre:

• ASIC’s 2025 Governance Push: The Australian Securities and Investments Commission (ASIC) has ramped up scrutiny on board oversight, especially in listed companies. Updated guidelines now require more transparent disclosure of executive compensation and clearer reporting on conflicts of interest.

• Super Funds and Stewardship: Australia’s $3.9 trillion superannuation sector is under pressure to improve stewardship, with new APRA rules mandating stronger risk oversight and voting transparency for fund managers. Super funds are increasingly expected to police agency costs in their investments, not just their own operations.

• Tech, Data, and AI: As more companies deploy AI-driven management tools, there’s a new frontier of agency costs. While AI can help monitor performance, it also introduces risks if the algorithms themselves don’t align with shareholder interests.

Recent high-profile cases—like the 2024 class action against a major ASX-listed firm for undisclosed executive bonuses—have kept the topic in the headlines. Investors are demanding tougher checks and balances to ensure their money isn’t quietly siphoned off through misaligned incentives.

How Agency Costs Affect Australian Investors

Agency costs don’t just erode company profits—they can directly impact your investment returns. Here’s how:

• Reduced Dividends: When companies overspend on executive perks or pursue pet projects, there’s less left for shareholders.

• Lower Share Prices: Persistent agency conflicts often signal weak governance, which investors penalise with lower valuations.

• Higher Risk: Firms with unchecked agency costs are more likely to face scandals or regulatory action, as seen in several recent Australian banking and mining controversies.

For example, the 2024-25 reporting season saw several ASX companies take hits to their share price after audit committees revealed excessive management bonuses relative to performance. In the superannuation space, funds that failed to rein in agency costs underperformed their benchmarks, leading to member outcry and even regulatory intervention.

Strategies to Minimise Agency Costs in 2025

With agency costs under the microscope, what can investors and business owners do?

• Insist on Transparency: Look for companies and funds with clear, regular disclosures around executive pay, decision-making, and conflicts of interest.

• Support Strong Governance: Vote at AGMs, support independent board appointments, and favour firms with robust audit and risk committees.

• Align Incentives: Push for executive remuneration linked directly to long-term performance—not just short-term share price spikes.

• Engage With Stewardship: If you’re a super fund member, ask how your fund votes on key governance issues. Many now publish stewardship reports as required by 2025 regulations.

Many of Australia’s largest institutional investors, including the Future Fund and industry super funds, are now using detailed ESG (environmental, social, and governance) frameworks to assess agency risks before investing. New digital tools, including AI-driven monitoring of board decisions, are also giving investors a sharper edge in spotting potential misalignments early.

The Bottom Line

As Australia’s financial landscape becomes more complex in 2025, agency costs are a central concern for anyone who wants their investments to work harder. By understanding how these costs arise—and insisting on transparency and good governance—you can help keep incentives aligned, risks in check, and your returns on track.