Agency Risk

There was a young man who approached me sometime back for some assistance. He seemed sensible and had big dreams for his life. He said he wanted to start a small business dealing in second-hand phones. We had several engagements, and he requested some little capital to start his venture. I advanced him UGX one million to see what he could do with it. I promised to guide him and pledged more capital in case he demonstrated progress.

A couple of weeks went by, and I didn't hear from him. I reached out, but his phones were off. I later learned from a mutual acquaintance that this guy was a fraud. He had done the same thing to several other people. I decided not to pursue the matter any further and wrote off the advance. I then reflected on the low-trust environment we live in and how it gives rise to the concept of agency risk.

Agency risk arises when one person, the agent, is entrusted to act on behalf of another, the principal, but fails to align their actions with the principal’s best interests. Essentially, it’s the risk that the person you trust will act selfishly or incompetently instead of honoring their responsibility. This risk exists everywhere, from business partnerships to personal relationships, because human behavior isn’t always predictable. People might prioritize their interests over yours, even when they've pledged otherwise.

Agency risk manifests in many ways. In business partnerships, for instance, a partner might misuse company funds or prioritize personal gain over growth, leaving you to deal with the fallout. In corporate settings, directors are supposed to act in the best interests of shareholders, but unethical practices like misreporting profits or mismanaging funds for personal gain are all too common. Even in personal relationships, trust can be betrayed when someone manipulates or exploits another’s goodwill. It’s also evident in contracts, where a contractor might promise high-quality work but deliver substandard results. Everyday transactions aren’t exempt either; whether hiring someone to run errands or loaning money, there’s always the risk of the other party defaulting on their responsibility.

Despite these risks, being a trustworthy agent carries immense benefits. When people know they can count on you, opportunities open up naturally. Businesses built on trust often gain loyal customers and attract more investors. In personal relationships, trust fosters harmony and long-term bonds. A reputation for trustworthiness becomes a valuable asset, often leading to more partnerships and collaborations. On the other hand, those who act dishonestly may gain short-term benefits but eventually ruin their reputations. As the saying goes, “Trust is hard to earn but easy to lose.”

Although you can’t eliminate agency risk entirely, you can take steps to manage and minimize it. For starters, due diligence is essential. Before entrusting someone with money or responsibility, take time to verify their background and track record. Clear agreements in writing can also help by spelling out roles, expectations, and consequences for non-performance. Transparency is another critical factor—regular updates, whether financial reports from a business partner or progress updates from a contractor, build trust and allow you to detect red flags early. Aligning incentives ensures that the agent benefits when they succeed in meeting your goals, while limiting exposure means starting small and scaling up only when the other party proves reliable.

My experience with the young man taught me a painful but valuable lesson—agency risk is real, and managing it requires vigilance and wisdom. While it’s essential to believe in people and give them chances, it’s equally important to protect yourself by taking practical steps to reduce risk. Being trustworthy yourself is also key. When you consistently act with integrity, you inspire trust in others, creating opportunities for collaboration and growth. In a low-trust environment, being the exception can be your greatest strength.

Ultimately, while trust involves risk, it’s also the foundation of meaningful relationships—personal, professional, and beyond. Balancing caution with openness and striving to be the kind of person others can rely on is how you truly win in the long run.