Agency

R E L AT I O N S H I P S ,
CONFLICTS, & COSTS
Discussion Overview
AGENCY RELATIONSHI CONFLICTS COSTS
P
The Basic Law Understanding Agency Binding Actions and Duties Cost Defined in Agency
Relationships Problems

Creation of Agency Primary Agency Relationships Third Party Agencies Examples of Agency Costs

Two Types of Agency The Most Common Agency Two Major Types of Agency Agency Risks
Relationships Conflicts
Agency – The Basic Law
Agency is a fiduciary relationship whereby one party
expressly or impliedly authorizes another to act under
his or her control and on his or her behalf.

The party for whom another acts and from whom such
authority derives is a “principal.”

The one who acts for and represents the principal and
acquires his or her authority from the principal is an
“agent.”

Pursuant to the grant of authority by the principal, the

agent is the representative of the principal and acts for
and instead of, the principal.
Creating An Agency
Contracts
◦ Employment
◦ Representation
◦ Power of Attorney

Assignment Agreement

Appointment / Election
Two Types of Agency Authority

Actual authority is created in a situation where the Apparent authority is the power that arises only
authority to act on behalf of someone else is if a third party reasonably infers, from the
expressed (in writing) or implied (necessary, principal's conduct, that the principal granted
customary, reasonable) by the actions of a person. such power to the agent.
Agency Relationship Fiduciary and consensual relationship between two person

The relationship between an agent and a

principal is a contractual one

The relationship can be terminated only by the

acts or agreement or by operation of law

The agent cannot delegate his or her authority

and have services performed by a subagent
Agency Relationships
The primary agency relationships in business are those: These relationships are not necessarily harmonious.

between stockholders and managers between debtholders and stockholders.

 Common Agency Relationships
An agent represents both buyer and seller in a single transaction and
Buyer’s agency Dual Agency carries fiduciary responsibilities to both principals. The mistake of an
agent acting as a dual agent becomes a mutual mistake of fact by both
principals.

A principal’s agent has to be loyal, maintain confidentiality, be obedient,

Seller’s agency Buyer’s agency provide reasonable care and diligence, and give accounting for all
funds. This agency usually involves funds and purchases.

Agent is also known as a listing agent. The principal possesses the same
Dual Agency Seller’s agency fiduciary responsibilities to the agent. In this agency, the client
relationship is established through a listing agreement.
Duties vs. Actions
The relationship between a principal and an agent is fiduciary and an agent’s actions bind the principal.
The law of agency controls the legal relationship in which an agent interacts with a third party for his/her
principal. An agent owes certain duties towards his/her principal and a principal owes certain duties

towards his/her agent. The scope of an agent’s duty to the principal is determined by:
 
• The terms of the agreement between the parties
• Extent of the authority conferred
• The fiduciary obligations to the principal
 Agent’s Duties
An agent’s primary duties are:

• act on behalf of and be subject to the control of the principal;

• act within the scope of authority or power delegated by the principal;
• discharge his/her duties with appropriate care and diligence; and
• avoid conflict of interest between his/her personal interests and the interests of the principal.
 
Other duties of an agent include:
 
• not to acquire any undisclosed material benefit from a third party
• to act with the care, competence, and diligence
• to act reasonably and to refrain from conduct that is likely to damage the principal’s interests.

An agent is liable to indemnify a principal for loss or damage resulting from his/her violation of the duties described above.
 Principal’s Duties
A principal owes certain contractual duties to his/her agent. A principal’s primary duties to his/her agent
include:
 
• To compensate the agent as agreed; and
• To indemnify and protect the agent against claims, liabilities, and expenses incurred in the agent correctly
discharging the duties assigned by the principal.
The Enron Case
Reference Video: The Enron Scandal - An Animated Overview
Source: https://www.youtube.com/watch?v=vMj0t2Vsyvs
In 2000, the business started to crumble. CEO Jeffrey
Skilling concealed all financial losses resulting from the
trading business and broadband projects by applying
the accounting concept of mark-to-market accounting.
The company kept building assets. It reported profits
that were yet to be earned. If the actual profit earned
were less than the reported earnings, the loss was never
reported. Additionally, the business transferred the asset
to the off-the-books corporation. Like this, the
corporation concealed its losses
 The Enron Case

Kenneth Lay, Founder and CEO Jeffrey Skilling, Former CEO Andrew Fastow, Former CFO Enron Stockholders / Creditors

AGENT PRINCIPAL
Enron C-Level Executives
David B. Duncan, Partner – Arthur Andersen LLP Enron Stockholders / Creditors
Types of Agency Conflicts
Type 1 is the agency
problem that arises
between the
principal as the
Stockholders The issue of agency
Type II is the agency
owner of companies
vs problem that occurs
and agents as the Management Other between controlling
manager who is the Creditors Stakeholders shareholders and
executor the minority shareholders.
company's
operations.
 Type 1 Agency Conflicts
Stockholders vs. Management – Large companies may have many
equity holders. It is always crucial for an organization to separate
management from ownership. The company will hire professionals to
manage the key functions of the organization. But hiring outsiders may
become troublesome for stakeholders. The managers hired may make
unjust decisions and misuse the shareholders’ money, which can be a
reason for the conflict of interests between the two.
 
Stockholders vs. Creditors – The stockholders might pick up risky
projects to make more profits. This increased risk might elevate the
required ROR on the company’s debt. Hence, the overall value of the
pending debts might fall. If the project sinks, this can result to agency
problems with the stockholders and the creditors.
Type 2 Agency Conflicts
Stockholders vs. Other Stakeholders – The
stakeholders of a company may have a conflict
of interests with other stakeholders like
customers, employees, society, and
communities. For example, the employees
might be asking for a hike in their salaries
which, if rejected by the stakeholders, there is
a probability of agency problems occurring.
Agency Costs
KEY TAKEAWAYS
• An agency cost is an internal expense that comes from
an agent taking action on behalf of a principal.
• Core inefficiencies, dissatisfactions, and disruptions
contribute to agency costs.
• Agency costs that include fees associated with
managing the needs of conflicting parties are called
agency risk.
• An agent-principal relationship exists between a
company's management (agent) and its shareholders
(principal).
Agency Risks
Agency risks are the uncertainties that can
affect the achievement of the agency's strategic
objectives, such as agency reputation, data
integrity, funding, safety, and leadership.
 
The main four types of risk are:
Strategic Risks
Compliance and Regulatory Risks
Financial Risks
Operational Risks
 
These risks entail costs and are not necessarily
coming from conflicts but more from changes.