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Agency and Shareholder Primacy

In: Business and Management

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Agency Theory and Shareholder Primacy Question
The corporate law structure mandates corporations to act according to shareholders interests. The shareholders control companies by appointing the directors, suing wasteful managers on behalf of the corporation and approving important transactions. On the other hand, the other stakeholders such as the employees and customers have the right to make contractual claim however, the shareholders receives the larger share. Therefore, shareholder primacy is centrally focusing on the shareholders compared to the other stakeholders (Smith, p. 277-278). Even though the shareholder dominates the corporate law structure, the shareholder is mainly expressed under the law that relates to fiduciary duties. The directors are obligated to make decisions which benefit the shareholders. The shareholder primacy norm is thus the fiduciary duty aspect.
The shareholder primacy theory is rooted to the early decisions in the Dodge versus Ford Motor Company case in the Michigan Supreme Court in 1919. The court ruled that the managers are required to conduct corporate activities in the best interest of the shareholders. Therefore, according to shareholder primacy theory, the corporate activities are bound by the shareholders obligations (Keay, p. 375). The shareholder primacy theory holds that the non shareholders are granted rights through contracts which in turn fulfills their interests and adequately safeguards their rights.
Companies are often formed by the owners who are generally referred to as the shareholders. However, these owners appoint people to run the business on their behalf thus, leading to formation of the principal / agent relationship. The owner who is acknowledged as the principal often hires the manager who is referred to as the agent to act as a steward. However, the managers pursue own interests…...

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