Agency relationships are essential to the operation of most, if not all, businesses. According to Bagley (2019), they constitute the delegation of some power from a principal to an agent that represents them. The employer-employee relationship is a classic example of an agency relationship that is present in most companies. In the beginning, with no employees or investors, there should be no agency conflicts present in the new business. The author, who is also the owner, will deal with customers directly and provide them with the services of the platform. As there is no one else involved in the internal operations of the company, there should be no opportunity for a disagreement to arise.
When a lender decides to loan money to a company, they lose control of their resources and have to rely on the business to make enough of a profit to return the money with interest. As such, lenders can be concerned that the company’s management will act in a way that does not benefit them. For example, the organization can engage in risky initiatives that will incur substantial damage if they fail. They can attempt to mitigate such costs via different constraints that limit the business’s actions to ones approved by the lender. The most prominent way is to include clauses known as debt covenants in lending agreements.
Corporate governance is the portfolio of various rules and practices that control a corporation’s behaviors. The provisions that govern employee pay, leave, vacations, and other human resources matters are one example. The internal hierarchy and responsibility distribution scheme within individual departments, as well as at the highest level, is another. The rules that discuss the company’s behavior in the event of a hostile takeover are a third example. The makeup of the Board of Directors and the rules for appointing and promoting its members are a fourth. Lastly, accounting methods and regular auditing of various performance aspects are the fifth example, though there are numerous other critical aspects to the concept.
Stock options are sometimes used in compensation plans instead of a fixed salary for employees. In them, the worker receives company shares instead of a part or entirety of their wages. These stocks fluctuate in price as the company’s net worth changes, similarly to ordinary market shares, but are typically subject to a variety of limitations. Overall, they are seen as a form of incentivization, where the worker’s income is proportional to the company’s success and, therefore, their performance. However, as Marthinsen (2018) notes, the system encourages shortsighted and undesirable behavior while not necessarily rewarding good performance due to the difficulty of achieving above-expectations growth. Overall, the benefits of using the system over using traditional salary-based systems are currently ambiguous.
Regulatory agencies and legal systems set numerous rules for the operation of a corporation. Some of them are recommendations based on good practices that companies are not obligated to follow. However, as Hermalin and Weisbach (2017) note, some laws impose unchangeable rules and thus render any provisions that contradict them irrelevant. The existence of such a system is not necessarily illegal, but it would be against the law to put the rule into practice. As such, corporations have to carefully review local regulations and ensure that their rules comply with the restrictions placed upon the business to avoid violations, whether intentional or otherwise.
References
Bagley, C. E. (2019). Managers and the legal environment: Strategies for business (9th ed.). Boston, MA: Cengage.
Hermalin, B. E., & Weisbach, M. S. (2017). The handbook of the economics of corporate governance. Oxford, United Kingdom: North-Holland.
Marthinsen, J. E. (2018). Risk takers: Uses and abuses of financial derivatives (3rd ed.). Boston, MA: Walter de Gruyter Inc.