Recently the Agency Theory is extensively used in the study of government-university relationship in higher education system. The theory expounds the main concept of information asymmetry and goal conflict in the relationship. In this paper these two concepts are used to explain efforts undertaken by the Malaysian Federal Government to improve the quality of higher education and their struggle to reform the funding system in public universities. This move is parallel to the implementation of National Higher Education Strategic Plan Beyond 2020 which was announced in 2007. Interestingly, this study found that public universities in Malaysia are working positively towards materialising the government objectives regardless of the government funding cuts. Indeed, the government initiative to keep track of the universities performances by using the monitoring, controlling and incentives mechanisms have helped reduce the agency problems in the government-university relationship.