Agency Theory in Australian Finance: 2025 Trends & Impacts

In the ever-evolving world of Australian finance, agency theory has become more relevant than ever. As 2025 ushers in new regulatory standards and a renewed focus on corporate responsibility, understanding the dynamics between principals (like shareholders) and agents (such as company executives) is crucial for investors, business owners, and policymakers alike.

What Is Agency Theory and Why Does It Matter?

At its core, agency theory examines the relationship between those who own a business (principals) and those who run it (agents). The theory highlights potential conflicts of interest that can arise when the goals of management diverge from those of shareholders. In practical terms, agency theory is the lens through which issues like executive compensation, risk-taking, and corporate governance are scrutinised.

• Shareholder vs. Management Interests: Shareholders typically seek long-term value, while executives may be tempted by short-term gains or personal rewards.

• Information Asymmetry: Managers often have more information about daily operations, potentially leading to decisions that favour their interests over those of investors.

• Costs of Monitoring: Ensuring alignment often requires robust oversight, which can be expensive and complex.

Agency Theory in Action: Real-World Australian Examples

Recent events in Australia’s financial sector offer textbook cases of agency theory in motion. In 2025, the banking and superannuation industries have seen renewed scrutiny from both regulators and the public, prompted by revelations of misaligned incentives and governance failures.

• Executive Bonuses and Royal Commissions: The aftermath of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry continues to influence boardroom discussions. Many ASX-listed companies have revamped their executive bonus structures, now tying incentives more closely to long-term performance and risk management metrics.

• Superannuation Fund Governance: With over $3.7 trillion in assets under management, super funds face growing pressure to prove that their trustees act in members’ best interests. The Australian Prudential Regulation Authority (APRA) has implemented new disclosure and conflict management requirements in 2025, demanding greater transparency and accountability from fund managers.

• Start-ups and Venture Capital: Agency conflicts aren’t just a big-bank issue. In the tech start-up scene, founders and venture capitalists often have differing visions for company growth and exit strategies. Legal agreements and staged funding are increasingly used to align incentives and mitigate risks.

2025 Policy Updates: Strengthening Agency Alignment

This year, several policy changes are directly addressing agency problems in Australia’s financial landscape:

• Mandatory Clawback Provisions: The Treasury Laws Amendment (Executive Accountability and Remuneration) Act 2025 has introduced mandatory clawback clauses for senior executives at all ADIs (Authorised Deposit-taking Institutions). This means bonuses can be reclaimed if misconduct or excessive risk-taking is uncovered after the fact.

• Enhanced Director Duties: Updates to the Corporations Act 2001 now require directors to demonstrate more robust oversight of management decisions, particularly in areas like ESG (Environmental, Social, and Governance) risk and climate disclosures.

• Greater Shareholder Say: The ‘two-strikes’ rule has been strengthened, making it easier for shareholders to vote down executive pay packages they believe are misaligned with performance.

These reforms reflect a clear shift towards accountability and transparency, minimising the classic agency gap and restoring confidence among investors and the public.

The Future: Why Agency Theory Remains Vital

As technology transforms the way companies operate—think AI-driven investment strategies or decentralised finance—agency theory remains an essential framework for understanding risk, trust, and value creation. In a world where remote work and digital boardrooms are the norm, clear lines of accountability and aligned incentives are more important than ever.

For Australian investors, business leaders, and regulators, keeping agency theory front of mind is key to navigating the challenges and opportunities of 2025 and beyond.