The relationship between those who own assets (principals) and those who manage them (agents) sits at the heart of the Australian economy. In 2025, the so-called principal-agent problem is more than a textbook concern—it’s a real-world challenge shaping superannuation, corporate governance, and even startup culture. Whether you’re an investor, business owner, or employee, understanding this dynamic is crucial for making smarter financial decisions.
What is the Principal-Agent Problem?
At its core, the principal-agent problem arises when someone (the agent) makes decisions on behalf of another (the principal), but their interests aren’t perfectly aligned. Think of a company’s shareholders (principals) who hire managers (agents) to run the business. While both want the business to succeed, managers might be tempted to pursue goals that benefit themselves—like bigger bonuses, perks, or less risky strategies—even if those aren’t best for the owners.
This misalignment can lead to agency costs: wasted resources, poor investment decisions, or even outright misconduct. In 2025, with Australia’s corporate sector under greater scrutiny and new regulations on the horizon, the stakes are higher than ever.
Where the Principal-Agent Problem Strikes in Australia
- Superannuation Funds: With over $3.7 trillion in assets, Australia’s super funds exemplify the principal-agent problem. Trustees and fund managers (agents) are meant to act in the best interests of millions of members (principals). Yet, recent APRA reviews and the ongoing Your Future, Your Super reforms have highlighted gaps in accountability, fee structures, and investment decisions that don’t always align with members’ best interests.
- Corporate Boards & Executive Pay: Executive remuneration packages—especially in ASX-listed companies—remain a flashpoint. The 2025 AGM season has already seen shareholder revolts against pay packets perceived as excessive or insufficiently tied to long-term company performance. The introduction of stricter “clawback” provisions and mandatory non-binding votes on remuneration reports are direct responses to the agency problem.
- Startups & Venture Capital: As Australia’s tech sector matures, founders (agents) often take funding from venture capitalists (principals). But when growth targets or exit strategies diverge, tensions can emerge. Recent high-profile exits and down-rounds in the local startup scene highlight the risk of misaligned incentives.
2025 Policy Updates and Regulatory Trends
Several developments in 2025 are reshaping how the principal-agent problem is managed:
- Strengthened Director Accountability: ASIC’s 2025 guidelines now require more transparent reporting of conflicts of interest and direct links between executive pay and measurable long-term outcomes. Boards are under pressure to justify remuneration and risk management practices to both shareholders and regulators.
- Superannuation Performance Tests: The expanded APRA performance test regime now covers more MySuper and choice products. Funds failing the test must notify members and risk outflows, increasing pressure on agents to act in members’ best interests.
- ESG and Stewardship Codes: Environmental, social, and governance (ESG) criteria are now embedded in many institutional investors’ mandates. This means agents must consider broader stakeholder interests, not just financial returns—potentially adding new layers to the agency dilemma.
How Investors and Businesses Can Respond
Understanding the principal-agent problem isn’t just academic. Here’s how you can protect your interests in 2025:
- For Investors:
- Scrutinise super fund performance and fees. Use APRA’s MySuper and Choice dashboards to compare funds, and don’t be afraid to switch if your fund underperforms.
- Engage at AGMs. Use your voting rights to hold boards accountable for executive pay, ESG commitments, and risk management.
- For Business Owners and Boards:
- Align incentives: Structure pay and bonuses around long-term performance, not just short-term targets.
- Promote transparency: Regularly disclose conflicts of interest, risk exposures, and the rationale behind strategic decisions.
- Foster a culture of stewardship: Encourage managers to think like owners, with equity participation or profit-sharing schemes where appropriate.
Conclusion: Turning Agency Risk into Opportunity
The principal-agent problem isn’t going away—but in 2025, awareness and smart governance can turn it from a risk into a competitive advantage. Whether you’re managing your own super, investing in shares, or building a business, understanding agency dynamics puts you ahead. Stay alert to new regulations, demand transparency, and always ask: whose interests are really being served?
