a] Agency theory is the theory that is used to understand the relationship between agents and the principlas. The agent is the person who represents the prinicipal in the business transaction and he is required to represent for the best interest of the principal. It means that the agent has to work for the best of principal without regard for his self interest. The various interest of these principals and agents can become a source of conflict as few agents may not work and perfectly act in the principal's best interests. This disagreement and miscommunications between the two will result in various problems. This can lead to the problem known as principal-agent problem. This problem occurs when the interest of a principal and agent come under conflict. These situations are minimised through corporate policy. Proper incentives can be used to redirect the behaviour of these agents so that they would realign with the interest and concerns of the prinicpal. Incentives to the agents which encourage the wrong behaviour must be removed. Agents should be encouraged to understand mechanisms that will help businesses develop better corporate policy. For example, if an agent routinely performs keeping in mind the best interest of the principal the agency loss will be zero and the organisation between the two will be strong and profitable.

b] Mangerial incentives that are based on share options and profit targets ensure that managers pursue the goal of maximising shareholder wealth. The wealth maximisation of the shareholder goal states that management of the company should try to maximise the present value of the expected future returns to the shareholders of the firm. These returns of the firm takes the form of dividend payments from the sale of the common stock. The longer the time it takes to receive a benefit like cash benefit or appreciation of the firm's stock, the lower will be the value investors place on that benefit. Along with that, the greater the risk that is associated with receiving a future benefit, the benefit that investors place on that will be of lower value