Week 10 - Agency Guiding Questions

Week 10 - Forms of Business Organizations - Hiring Agents & Distributors – Chapter 17
- Explain why Agency is fundamentally important to int’l business.
Agency is fundamentally important to international businesses because there are three ways to do business
internationally with the use of an intermediary, using a sales representative, a distributor or a commercial agent.
Most buisnesses will be dealing with the need to import/export, and agency is fundamental because to
international businesses because national laws vary widely on the meaning of designating a foreign represent as
an agent. Often, under several national laws, an agent can bind the principal to contracts with 3 rd party customer,
through actual or apparent authority. However, across countries apparent authority may or may not be presumed
in specific situations. As a result, in businesses at the beginning, a legal relationship in which one person (agent)
represents another (principal) and is authorized to act for him/her.
National laws vary widely on the meaning of designating a foreign represent as an agent. Often, under many national
laws, an agent can bind the principal (manufacturer-exporter) to contracts with third-party customers, either through
actual or apparent authority.
However, across countries apparent authority may or may not be presumed in specific situations. In beginning a
new agency or distribution relationship, the exporter should not initially give a foreign sales representative the
ability to bind it to contracts with third parties. Instead, although inconvenient, the exporter should retain the
right to approve or disapprove any such contracts. In the United States, depending on the agent’s title and
characteristics, apparent authority is often presumed. However, in international practice actual or apparent
authority is not presumed. In such cases the foreign purchaser should ask for proof of the agent’s authority to
bind the exporter.
It is especially important in international distribution contracts to provide for the protection of intellectual
property rights (IPR), trade secrets, and know-how. A common clause is called the non-challenge or validity
clause, which prohibits the distributor from challenging the validity of the manufacturer-exporter’s IPR
- Understand the roles and related legal responsibilities of both

Principal and Agent.
Role of the agent: the person who is authorized to act on behalf of the Principal: this
rd
relationship allows the Agent to bind the Principal to contracts with 3 parties (customers,
etc.)
Role of the principal: the person who authorizes another to act on his/her behalf; example:
manufacturer-exporter
Principal: Party who employs another person to act on their behalf
Agent: Party who agrees to act on behalf of another
Principal-agent relationship: Formed when an employer hires an employee and gives that
employee authority to act and enter into contracts on their behalf
There are two types of authority:
Express: occurs when a Principal and Agent expressly

agree to enter into
an agency agreement with each other
Implied: Occurs when a Principal and an Agent do not
expressly create an agency, however Agency
relationship may be implied (or inferred) through the
actions/conduct of Principal and Agent
Legal duty to act primarily for another’s benefit in matters
concerning such
undertaking, having characteristics of trust and loyalty
} Fiduciary Duty
◦ Fiduciary duty is a legal requirement of

loyalty and care that applies to any person or
organization that has a fiduciary relationship
with another person or organization.
◦ Requires trust and good faith dealings
Duty of Loyalty
Duty of Care
 } An Agent is a Fiduciary for the Principal
 } The law requires Agent to be completely

honest & loyal to the
Principal in their dealings with each other.
AGENT’S DUTY:
 } If the Agent is being paid to act for the

Principal, then the contract is usually
separate from the POA itself. It is a
separate document, private between
them.
 } In contrast, the POA is intended to be

shown to 3rd parties.
PRINCIPALS DUTY
Duty to indemnify: Principal owes a duty to

indemnify the Agent for any losses the agent suffers
because of the principal’s conduct
} Duty to cooperate: Unless otherwise agreed, the
Principal owes a duty to cooperate with and assist the
Agent in the:
◦ Performance of the Agent’s duties ◦ Accomplishment
of the agency
- What is the Agency Problem (also known as the Agency Theory)?

What solutions can you offer?
An agency problem is a conflict of interest inherent in any relationship

where one party is expected to act in another's best interests. In corporate
finance, an agency problem usually refers to a conflict of interest between
a company's management and the company's stockholders. The manager,
acting as the agent for the shareholders, or principals, is supposed to make
decisions that will maximize shareholder wealth even though it is in the
manager’s best interest to maximize their own wealth.
 An agency problem is a conflict of interest inherent in any

relationship where one party is expected to act in the best interest of
another.
 Agency problems arise when incentives or motivations present
themselves to an agent to not act in the full best interest of a
principal.
 Through regulations or by incentivizing an agent to act in
accordance with the principal's best interests, agency problems can
be reduced.
Agency problems are common in fiduciary relationships, such as between

trustees and beneficiaries; board members and shareholders; and lawyers and
clients. A fiduciary is an agent that acts in the principal's or client's best interest.
These relationships can be stringent in a legal sense, as is the case in the
relationship between lawyers and their clients due to the U.S. Supreme Court's
assertion that an attorney must act in complete fairness, loyalty, and fidelity to
their clients.
Regulations
Principal-agent relationships can be regulated, and often are, by contracts,
or laws in the case of fiduciary settings. The Fiduciary Rule is an example
of an attempt to regulate the arising agency problem in the relationship
between financial advisors and their clients. The term fiduciary in the
investment advisory world means that financial and retirement advisors are
to act in the best interests of their clients.2 In other words, advisors are to
put their clients' interests above their own. The goal is to protect investors
from advisors who are concealing any potential conflict of interest.
For example, an advisor might have several investment funds that are
available to offer a client, but instead only offers the ones that pay the
advisor a commission for the sale. The conflict of interest is an agency
problem whereby the financial incentive offered by the investment fund
prevents the advisor from working on behalf of the client's best interest.
Incentives
The agency problem may also be minimized by incentivizing an agent to
act in better accordance with the principal's best interests. For example, a
manager can be motivated to act in the shareholders' best interests
through incentives such as performance-based compensation, direct
influence by shareholders, the threat of firing, or the threat of takeovers.
Principals who are shareholders can also tie CEO compensation directly to
stock price performance. If a CEO was worried that a potential takeover
would result in being fired, the CEO might try to prevent the takeover,
which would be an agency problem. However, if the CEO was
compensated based on stock price performance, the CEO would be
incentivized to complete the takeover. Stock prices of the target
companies typically rise as a result of an acquisition. Through proper
incentives, both the shareholders' and the CEO's interests would be
aligned and benefit from the rise in stock price.
Principals can also alter the structure of an agent's compensation. If, for

example, an agent is paid not on an hourly basis but by the completion of
a project, there is less incentive to not act in the principal’s best interest. In
addition, performance feedback and independent evaluations hold the
agent accountable for their decisions.
1. Contract design
The main purpose of contract design is the creation of a contract

framework between the principal and the agent to address issues of
information asymmetry, stimulate the agent’s incentives to act in the
best interests of the principal, and to determine procedures for
monitoring agents.
2. Performance evaluation and compensation
The agent’s compensation is the primary method of aligning the

interests of both parties. In order to address the principal-agent
problem, the compensation must be linked to the performance of the
agent.
The performance of the agent is usually measured by subjective

evaluation because it is a more flexible and balanced assessment
method for complex jobs. Common methods of agent compensation
include stock options, profit-sharing, and deferred compensation. Tying
the agent’s compensation closely to the benefits obtained for the
principal helps to eliminate conflicts of interest.

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Week 10 - Forms of Business Organizations - Hiring Agents & Distributors – Chapter 17

- Explain why Agency is fundamentally important to int’l business.

- Understand the roles and related legal responsibilities of both

Principal: Party who employs another person to act on their behalf

Agent: Party who agrees to act on behalf of another

Express: occurs when a Principal and Agent expressly

◦ Fiduciary duty is a legal requirement of

◦ Requires trust and good faith dealings

 } The law requires Agent to be completely

Principal in their dealings with each other.

 } If the Agent is being paid to act for the

 } In contrast, the POA is intended to be

Duty to indemnify: Principal owes a duty to

- What is the Agency Problem (also known as the Agency Theory)?

An agency problem is a conflict of interest inherent in any relationship

 An agency problem is a conflict of interest inherent in any

Agency problems are common in fiduciary relationships, such as between

Principals can also alter the structure of an agent's compensation. If, for

The main purpose of contract design is the creation of a contract

2. Performance evaluation and compensation

The agent’s compensation is the primary method of aligning the

The performance of the agent is usually measured by subjective

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