8/6/2019 myla-mgt 103

1/36

1

8/6/2019 myla-mgt 103

2/36

TheThe separationseparation ofof ownershipownership andandcontrolcontrol refersrefers toto thethephenomenonphenomenon associatedassociated withwithpubliclypublicly heldheld businessbusinesscorporationscorporations inin whichwhich thethe

shareholdersshareholders ((thethe residualresidualclaimantsclaimants)) possesspossess littlelittle or or nonodirectdirect controlcontrol overover managementmanagementdecisionsdecisions..

2

8/6/2019 myla-mgt 103

3/36

ShareholdersShareholders elect directors whoelect directors who

appoints managersappoints managersDirectorsDirectors representsrepresents

shareholders interests andshareholders interests anddetermines the broad policiesdetermines the broad policiesthat the managers will carry outthat the managers will carry out

Professional managersProfessional managers areareemployed by shareholders onemployed by shareholders onwhich twhich they depend on.hey depend on.

3

8/6/2019 myla-mgt 103

4/36

Historically, firms were managed bythe founder ownersfounder owners & theirdescendantsdescendants.

The managerial revolution led toseparation of ownership & control

which is the basis of the modernpublic corporation.

4

8/6/2019 myla-mgt 103

5/36

He is best known among economists and

corporate law specialists for hisgroundbreaking work in corporategovernance.

He was the author of The Modern Corporation

and Private Property, a groundbreaking work oncorporate governance, and an important

member of U.S. President Franklin Roosevelt's

"Brain Trust".

5

8/6/2019 myla-mgt 103

6/36

The Modern Corporation and PrivateThe Modern Corporation and Private

PropertyProperty,, which he co-authored witheconomist Gardiner MeansGardiner Means,, remains themost quoted text in corporate governancestudies.

BerleBerle and Meansand Means showed that the meansof production in the U.S. economy werehighly concentrated in the hands of thelargest 200 corporations, and that within

the large corporations managerscontrolled firms despite shareholders'formal ownership.

6

8/6/2019 myla-mgt 103

7/36

Basis of the Modern Corporation

Shareholders purchase stock, becoming

residual claimants Shareholders reduce risk by holding

diversified portfolios

Professional managers are contracted to

provide decision making

7

8/6/2019 myla-mgt 103

8/36

Modern public corporation formleads to efficient specialization oftasks:

Risk bearing by shareholders

Strategy development anddecision making by managers

8

8/6/2019 myla-mgt 103

9/36

9

Hire

and create

8/6/2019 myla-mgt 103

10/36

Agency relationships are formed by the

mutual consent of a principalprincipal and an

agentagent. AgencyAgency is the fiduciary relationshipfiduciary relationship

which results from the manifestation ofconsent by one person to another that

the other shall act in his behalf and

subject to his control, and consent by

the other so to act.

10

8/6/2019 myla-mgt 103

11/36

Agency LawAgency Law The large body of

common law that governs agency.

A mixture of contract law and tort law.

PrincipalPrincipal The party who employs

another person to act on his or her

behalf.

AgentAgent The party who agrees to act on

behalf of another.

11

8/6/2019 myla-mgt 103

12/36

PrincipalsPrincipals

obligationobligation totoperform theperform the

contractcontract

12

PrincipalPrincipal

AgentAgent Third PartyThird Party

AgencyAgency

ContractContract

Contract with third party on

behalf of principal

8/6/2019 myla-mgt 103

13/36

Any person who has the capacityto contract can appoint anagent to act on his or her behalf.

Persons who lackcontractualcontractualcapacitycapacity cannot appoint anagent.

e.g., insane persons and minors

13

8/6/2019 myla-mgt 103

14/36

An agency can be created only

to accomplish a lawful purpose.

Agency contracts that arecreated for illegal purposes or

are against public policy arevoid and unenforceable.

14

8/6/2019 myla-mgt 103

15/36

15

EmployerEmployer--Employee RelationshipEmployee Relationship

PrincipalPrincipal--Agent RelationshipAgent Relationship

PrincipalPrincipal--Independent ContractorIndependent Contractor

RelationshipRelationship

8/6/2019 myla-mgt 103

16/36

A relationship that results when an

employer hires an employee to

perform some form of physical service. An employee is not an agent unless

he or she is specifically empowered to

enter into contracts on the principalemployers behalf

16

8/6/2019 myla-mgt 103

17/36

An employer hires an employee and

gives that employee authority to act

and enter into contracts on his or herbehalf.

The extent of this authority is governedby any express agreement between the

parties and implied from the

circumstances of the agency.

17

8/6/2019 myla-mgt 103

18/36

Principals employ persons or businesseswho are not employees to perform

certain tasks on their behalf. These persons and businesses are called

independent contractorsindependent contractors.

A principal can authorize an

independent contractor to enter intocontracts. Principals are bound by the authorized

contracts of their independent contractors

18

8/6/2019 myla-mgt 103

19/36

The crucial factor in determiningwhether a person is an employee

or an independent contractor isthe degree of controldegree of control that theprincipal has over that person.

19

8/6/2019 myla-mgt 103

20/36

20

Type of RelationshipType of Relationship DescriptionDescription

EmployerEmployer--EmployeeEmployee The employer has the right to control the physicalThe employer has the right to control the physical

conduct of the employee.conduct of the employee.

PrincipalPrincipal--AgentAgent The agent has the authority to act on behalf of theThe agent has the authority to act on behalf of the

principal as authorized by the principal and impliedprincipal as authorized by the principal and implied

from the agency.from the agency.

An employee is often the agent of his employer.An employee is often the agent of his employer.PrincipalPrincipal--IndependentIndependent

ContractorContractor

The principal has no control over the details of theThe principal has no control over the details of the

independent contractors conduct.independent contractors conduct.

An independent contractor is usually not an agent ofAn independent contractor is usually not an agent of

the principal.the principal.

8/6/2019 myla-mgt 103

21/36

21

ExpressExpress

AgencyAgency

ImpliedImplied

AgencyAgency

ApparentApparent

AgencyAgency

Agency byAgency by

RatificationRatification

8/6/2019 myla-mgt 103

22/36

An agency that occurs when a principaland an agent expressly agree to enter

into an agency agreement with eachother. Exclusive agency contract

Power of attorney

Express agency contracts can be eitheroral or written unless the Statute ofFrauds stipulates that they must bewritten.

22

8/6/2019 myla-mgt 103

23/36

An agency that occurs when a principal

and an agent do not expressly create an

agency. The agency is implied from the conduct

of the parties.

The extent of the agents authority isdetermined from the particular facts and

circumstances of the particular situation.

Incidental authority

23

8/6/2019 myla-mgt 103

24/36

Agency that arises when a principal

creates the appearance of an agency

that in actuality does not exist. When an apparent agency is

established, the principal is estoppedestoppedfrom denying the agency relationship.

It is the principals actions that create an

apparent agency.

24

8/6/2019 myla-mgt 103

25/36

Agent must act on behalf of principal.

Principal must affirm entire deal

Principal must affirm before third party

withdraws from transaction Principal and 3rd party must have legal

capacity to contract when Agent made

the deal Principal must know all the materials

facts involved in the transactions.

25

8/6/2019 myla-mgt 103

26/36

26

Type of AgencyType of Agency DefinitionDefinition Enforcement of the ContractEnforcement of the Contract

ExpressExpress Authority is expresslyAuthority is expressly

given to the agent by thegiven to the agent by the

principal.principal.

Principal and third party arePrincipal and third party are

bound to the contract.bound to the contract.

ImpliedImplied Authority is implied fromAuthority is implied from

the conduct of the parties,the conduct of the parties,

custom and usage of trade,custom and usage of trade,or act incidental to carryingor act incidental to carrying

out the agents duties.out the agents duties.

Principal and third party actsPrincipal and third party acts

are bound to the contract.are bound to the contract.

8/6/2019 myla-mgt 103

27/36

27

Type of AgencyType of Agency DefinitionDefinition Enforcement of the ContractEnforcement of the Contract

ApparentApparent Authority created when theAuthority created when the

principal leads a third partyprincipal leads a third party

into believing that theinto believing that the

agent has authority.agent has authority.

Principal and third party arePrincipal and third party are

bound to the contract.bound to the contract.

By RatificationBy Ratification Acts of the agentActs of the agentcommitted outside thecommitted outside the

scope of his authority.scope of his authority.

Principal and third party arePrincipal and third party arenot bound to the contractnot bound to the contract

unless the principal ratifies theunless the principal ratifies the

contract.contract.

8/6/2019 myla-mgt 103

28/36

General agentsSpecial agents

28

8/6/2019 myla-mgt 103

29/36

Are authorized by the principal

to transact all of the affairs inconnection with a particular kindof business or trade or to transactall of the company's business,

these agents are generallyemployees of the company.

29

8/6/2019 myla-mgt 103

30/36

These are authorized by theprincipal to transact a definitebusiness affair or to do aspecific act, these agents are

generally third parties hired bythe company under anagreement.

30

8/6/2019 myla-mgt 103

31/36

31

8/6/2019 myla-mgt 103

32/36

The principal-agent problem or agency

dilemma arise under conditions of

incomplete and asymmetric information

when a principal hires an agent,

The two may not have the same interestsWhile the principal is, presumably, hiring

the agent to pursue the interests of theformer, the agent may shirk some duties to

pursue his/her own interests

32

8/6/2019 myla-mgt 103

33/36

33

8/6/2019 myla-mgt 103

34/36

Performance: reasonablediligence and skill (special skill)

Notification to principal

Loyalty (no conflict of interest)

ObedienceAccounting

34

8/6/2019 myla-mgt 103

35/36

Compensation (express orimplied)

Reimbursement and

indemnification

CooperationProvide safe working conditions

35

8/6/2019 myla-mgt 103

36/36

36