Agency problems and legal strategies
18 important questions on Agency problems and legal strategies
What are the three agency problems?
2. Majority shareholders - minority shareholders
3. Shareholders - other stakeholders
True or false: the greater the complexity of tasks undertaken by the agent, and the greater the discretion the agent must be given, the larger these "agency costs" are likely to be
With which things do agency costs rise?
2. Number of principals (coordination costs)
- Amount of Smaller shareholders
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True or false: high coordination costs render governance strategies less successful in controlling agents, and make regulatory strategies preferred as a legal strategy to reduce agency costs
How does law in general and corporate law in particular play a role in reducing agency costs?
What is the main distinction between regulatory strategies and governance strategies?
- Prescriptive
- Dictating the content of the principal agent relationship
- Agent constraining
Governance strategies: control behaviour
- Facilitate the principal's control over their agents behaviour
- Principal empowering
Why is the decision rights strategy less prominent in CL than the appointment rights strategy?
- Changes in the companies constitution
- Investment decisions (mergers)
- Decisions when directors are conflicted
What are the five legal strategies?
- Rules: command no harm principals interest
- Standards: internal affairs
2. Affiliation terms
- Terms of entry: before contracting
- Terms of exit: sell stock
3. Incentive alignment
- Trusteeship strategy: remove conflicts of interest
- Reward strategy: reward for advancing interest of principal
4. Appointment rights
- Selection: who do you select on your board
- Removal: when do you fire people
5. Decision rights
- Initiation
- Veto
How can terms of entry and exit constrain agents?
- Quality of performance is gathered before contracting
- Public investors need a form of systematic disclosure to obtain information (full disclosure)
Terms of exit:
- Right to sell the stock
- Escape opportunistic agents (right to withdraw/transfer shares)
What is one well-known example of the trusteeship strategy?
- Guardians to the firm
Explain why incentivising managers by compensating them in the form of shares is an example of both the "sharing rule" and the pay-for-performance rule
Pay-for-performance rule: agent is paid in successfully advancing the principals interest
- Shares are both; managers will have their own interest in making sure the company runs well, so they will match the expectations of the original shareholders
Why would a lot of minority shareholders have increased agency costs?
What would be the reason for directors having fiduciary (parenting) duties towards the company and not towards shareholders?
What is the main difference between the Anglo American model and the Stakeholders model?
- Shareholder value norms
-One tier board
- Low ownership concentration
Stakeholders model - civil law
- Stakeholder concerns
- Two tier board
- Focus on insider ownership
What are three modalities of enforcement?
2. Private enforcement - class actions
3. Gatekeeper control - Accountants and lawyers
Why can public enforcement be seen as suffering from weaker incentives than private enforcement?
A solution would be for public enforcers to retain some earnings
What is an example of private enforcement by a public actor?
In some civil law jurisdictions, ex ante consequences of violating company law rules is an annulent of corporate decisions. How can this reduce agency costs?
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