AGENCY REPLATIONSHIP

GENERAL CONTEXT

It is a fiduciary and consensual relationship between two persons where one person acts on behalf of the
other person and where the agent can form legal relationships on behalf of the principal.

In other words, one person (the agent) agrees to do something for another party (the principal), subject to
the control of the other party, and the other party (the principal) also agrees to the agreement.

An agent is like your “uncontrolled shadow” . Shadow because it is basically you. You doesn’t fully control its
movements but still it represents you coz it is connected to you.

IN A BUSINESS CONTEXT

• Within a corporation, agency relationships exist between:

• Shareholders and managers

Generally, Managers are naturally inclined to act in their own best interests. They decide in a lot of
things concerning the welfare or the status of the company.

• But the following factors affect managerial behavior:

• Managerial compensation plans

• Direct intervention by shareholders

• The threat of firing

• The threat of takeover

• Shareholders and creditors

• Shareholders (through managers) could take actions to maximize stock price that are detrimental to
creditors.

• In the long run, such actions will raise the cost of debt and ultimately lower stock price.

1. Money

Money is anything that is widely used for making

payments and accounting for debts and credits.

• Money has changed from gold/silver coins to paper currency to electronic funds.

• Cash can be obtained from an ATM any where in the world.

• Bills are paid and transactions are checked online.

2. Financial instruments

A financial instrument is a formal obligation that entitles one party to receive payments and/or a share of
assets from another party.

• Buying and selling individual stocks used to be

only for the wealthy.

• Today we have mutual funds and other stocks available through banks or online.

• Putting together a portfolio is open to everyone.

 3. Financial Markets

Places or networks where financial instruments can be sold quickly and cheaply.

• Once financial markets were located in Coffeehouses and Pubs.

• Then organized markets were created, like the New

York Stock Exchange.

• Now transactions are mostly handled by electronic markets.

• This has reduced the cost of processing

financial transactions.

• There is a much broader array of financial instruments available.

4. Financial Institutions

Firms that provide savers and borrowers with access

to financial instruments and financial markets.

• Examples: Banks, insurance companies, mutual funds, brokerage houses etc.

• Banks began as vaults, developed into institutions, to today’s financial supermarket.

• Offer a huge assortment of financial products and services.

5. Government regulatory agencies

• Government regulatory agencies were introduced

by federal government after the Great Depression.

• Government regulatory agencies provide wide- ranging financial regulation - rules and
supervision.

• Government regulatory agencies examine the systems a bank uses to manage its risk.

• The 2007-2009 financial crises has led governments to consider greater regulation.

6. Central banks

A central bank is a large financial institution that handles the government's finances, regulates the supply of
money and credit in the economy, and serves as the bank to commercial banks.

• Central banks began as large private banks to finance

wars.

• Central banks control the availability of money and credit to ensure low inflation, high growth
and stability of financial system.

• Today’s policymakers strive for transparency in their operations.