The Problem of Dual Agency in Company Law

Jul 08, 2021 By Si Gyeongmin

In a well-run company, the occurrence of agency problems between managers and shareholders is easy to understand. One is moral hazard. Managers may use their control of the company to extract the interests of shareholders. The second is the agency conflict between shareholders and creditors. Shareholders control the company by electing a board of directors, while the board of directors employs senior managers who actually run the company, and these managers have fiduciary responsibilities to shareholders. However, companies usually use debts for their business activities. When a company goes bankrupt, there will be agency conflicts, because managers may take excessive risks for the benefit of shareholders. If these risks ultimately yield substantial returns, most of these returns will go to shareholders. If the risk fails, the adverse consequences will usually be borne by the creditors. Therefore, after the creditors recognize this problem, they will sign contracts to stop managers from pursuing excessively high-risk behavior.

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