Locate a current article (within the last 2 years) from a professional journal (such as Harvard Business Review, Wall Street Journal, etc) that deals with Management of Employee topic ( could be: independent contractor, Agency law,or Principal-Agent relationship,Liability or termination af agency relationship.) Brief the article and attach it to the post. Related to Business Law.

Answer:

Managing for the long term....

When Valeant CEO Mike Pearson assured analysts that “all we care about is shareholder value.” At that point of time an idea that corporate managers should make maximizing shareholder value their goal—and that boards should ensure that they do—is relatively recent. It is rooted in what’s known as agency theory, which was put forth by academic economists in the 1970s. At the theory’s core is the assertion that shareholders own the corporation and, by their status as owners, have ultimate authority over its business and may legitimately demand that its activities be conducted in accordance with their wishes.

Attributing ownership of the corporation to shareholders sounds natural enough, but a closer look reveals that it is legally confused and, perhaps more important, involves a challenging problem of accountability.Keep in mind that shareholders have no legal duty to protect or serve the companies whose shares they own and are shielded by the doctrine of limited liability from legal responsibility for those companies’ debts and misdeeds.Agency theory has yet to grapple with the implications of the accountability vacuum that results from accepting its central—and in our view, faulty—premise that shareholders own the corporation.The effects of this omission are troubling. We are concerned that the agency-based model of governance and management is being practiced in ways that are weakening companies and—if applied even more widely, as experts predict—could be damaging to the broader economy.The effects of this omission are troubling. We are concerned that the agency-based model of governance and management is being practiced in ways that are weakening companies and—if applied even more widely, as experts predict—could be damaging to the broader economy.As a result, managers are under increasing pressure to deliver ever faster and more predictable returns and to curtail riskier investments aimed at meeting future needs and finding creative solutions to the problems facing people around the world.

According to Friedman's theory of Agency-Model. He characterizes the executive as “an agent serving the interests of his principal.”

•Shareholders own the corporation and are “principals” with original authority to manage the corporation’s business and affairs.

•Managers are delegated decision-making authority by the corporation’s shareholders and are thus “agents” of the shareholders.

•As agents of the shareholders, managers are obliged to conduct the corporation’s business in accordance with shareholders’ desires.

•Shareholders want business to be conducted in a way that maximizes their own economic returns. (The assumption that shareholders are unanimous in this objective is implicit throughout the article.)

Here is the Refered Article:

In the fall of 2014, the hedge fund activist and Allergan shareholder Bill Ackman became increasingly frustrated with Allergan’s board of directors. In a letter to the board, he took the directors to task for their failure to do (in his words) “what you are paid $400,000 per year to do on behalf of the Company’s owners.” The board’s alleged failure: refusing to negotiate with Valeant Pharmaceuticals about its unsolicited bid to take over Allergan— a bid that Ackman himself had helped engineer in a novel alliance between a hedge fund and a would-be acquirer. In presentations promoting the deal, Ackman praised Valeant for its shareholder-friendly capital allocation, its shareholder-aligned executive compensation, and its avoidance of risky early-stage research. Using the same approach at Allergan, he told analysts, would create significant value for its shareholders. He cited Valeant’s plan to cut Allergan’s research budget by 90% as “really the opportunity.” Valeant CEO Mike Pearson assured analysts that “all we care about is shareholder value.”

These events illustrate a way of thinking about the governance and management of companies that is now pervasive in the financial community and much of the business world. It centres on the idea that management’s objective is, or should be, maximizing value for shareholders, but it addresses a wide range of topics—from performance measurement and executive compensation to shareholder rights, the role of directors, and corporate responsibility. This thought system has been embraced not only by hedge fund activists like Ackman but also by institutional investors more generally, along with many boards, managers, lawyers, academics, and even some regulators and lawmakers. Indeed, its precepts have come to be widely regarded as a model for “good governance” and for the brand of investor activism illustrated by the Allergan story.

Yet the idea that corporate managers should make maximizing shareholder value their goal—and that boards should ensure that they do—is relatively recent. It is rooted in what’s known as agency theory, which was put forth by academic economists in the 1970s. At the theory’s core is the assertion that shareholders own the corporation and, by their status as owners, have ultimate authority over its business and may legitimately demand that its activities be conducted in accordance with their wishes.

Attributing ownership of the corporation to shareholders sounds natural enough, but a closer look reveals that it is legally confused and, perhaps more important, involves a challenging problem of accountability. Keep in mind that shareholders have no legal duty to protect or serve the companies whose shares they own and are shielded by the doctrine of limited liability from legal responsibility for those companies’ debts and misdeeds. Moreover, they may generally buy and sell shares without restriction and are required to disclose their identities only in certain circumstances. In addition, they tend to be physically and psychologically distant from the activities of the companies they invest in. Public company shareholders have few incentives to consider, and are not generally viewed as responsible for, the effects of the actions they favour on the corporation, other parties, or society more broadly. Agency theory has yet to grapple with the implications of the accountability vacuum that results from accepting its central—and in our view, faulty—premise that shareholders own the corporation.

The effects of this omission are troubling. We are concerned that the agency-based model of governance and management is being practiced in ways that are weakening companies and—if applied even more widely, as experts predict—could be damaging to the broader economy. We are concerned about the effects on corporate strategy and resource allocation. Over the past few decades the agency model has provided the rationale for a variety of changes in governance and management practices that, taken together, have increased the power and influence of certain types of shareholders over other types and further elevated the claims of shareholders over those of other important constituencies—without establishing any corresponding responsibility or accountability on the part of shareholders who exercise that power. As a result, managers are under increasing pressure to deliver ever faster and more predictable returns and to curtail riskier investments aimed at meeting future needs and finding creative solutions to the problems facing people around the world.

Don’t misunderstand: We are capitalists to the core. We believe that widespread participation in the economy through the ownership of stock in publicly traded companies is important to the social fabric, and that strong protections for shareholders are essential. But the health of the economic system depends on getting the role of shareholders right. The agency model’s extreme version of shareholder centricity is flawed in its assumptions, confused as a matter of law, and damaging in practice. A better model would recognize the critical role of shareholders but also take seriously the idea that corporations are independent entities serving multiple purposes and endowed by law with the potential to endure over time. And it would acknowledge accepted legal principles holding that directors and managers have duties to the corporation as well as to shareholders. In other words, a better model would be more company centered.

Before considering an alternative, let’s take a closer look at the agency-based model.

Foundations of the Model

The ideas underlying the agency-based model can be found in Milton Friedman’s well-known New York Times Magazine article of 1970 denouncing corporate “social responsibility” as a socialist doctrine. Friedman takes shareholders’ ownership of the corporation as a given. He asserts that “the manager is the agent of the individuals who own the corporation” and, further, that the manager’s primary “responsibility is to conduct the business in accordance with [the owners’] desires.” He characterizes the executive as “an agent serving the interests of his principal.”

These ideas were further developed in the 1976 Journal of Financial Economics article “Theory of the Firm,” by Michael Jensen and William Meckling, who set forth the theory’s basic premises:

•Shareholders own the corporation and are “principals” with original authority to manage the corporation’s business and affairs.

•Managers are delegated decision-making authority by the corporation’s shareholders and are thus “agents” of the shareholders.

•As agents of the shareholders, managers are obliged to conduct the corporation’s business in accordance with shareholders’ desires.

•Shareholders want business to be conducted in a way that maximizes their own economic returns. (The assumption that shareholders are unanimous in this objective is implicit throughout the article.)

Jensen and Meckling do not discuss shareholders’ wishes regarding the ethical standards that managers should observe in conducting the business, but Friedman offers two views in his Times article. First he writes that shareholders generally want managers “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” Later he suggests that shareholders simply want managers to use resources and pursue profit by engaging “in open and free competition without deception or fraud.” Jensen and Meckling agree with Friedman that companies should not engage in acts of “social responsibility.”

Much of the academic work on agency theory in the decades since has focused on ensuring that managers seek to maximize shareholder returns—primarily by aligning their interests with those of shareholders. These ideas have been further developed into a theory of organization whereby managers can (and should) instill concern for shareholders’ interests throughout a company by properly delegating “decision rights” and creating appropriate incentives. They have also given rise to a view of boards of directors as an organizational mechanism for controlling what’s known as “agency costs”—the costs to shareholders associated with delegating authority to managers. Hence the notion that a board’s principal role is (or should be) monitoring management, and that boards should design executive compensation to align management’s interests with those of shareholders.

The Model’s Flaws

Let’s look at where these ideas go astray.

1. Agency theory is at odds with corporate law: Legally, shareholders do not have the rights of “owners” of the corporation, and managers are not shareholders’ “agents.”

As other scholars and commentators have noted, the idea that shareholders own the corporation is at best confusing and at worst incorrect. From a legal perspective, shareholders are beneficiaries of the corporation’s activities, but they do not have “dominion” over a piece of property. Nor do they enjoy access to the corporate premises or use of the corporation’s assets. What shareholders do own is their shares. That generally gives them various rights and privileges, including the right to sell their shares and to vote on certain matters, such as the election of directors, amendments to the corporate charter, and the sale of substantially all the corporation’s assets.

Furthermore, under the law in Delaware—legal home to more than half the Fortune 500 and the benchmark for corporate law—the right to manage the business and affairs of the corporation is vested in a board of directors elected by the shareholders; the board delegates that authority to corporate managers.

The health of the economic system depends on getting the role of shareholders right.

Within this legal framework, managers and directors are fiduciaries rather than agents—and not just for shareholders but also for the corporation. The difference is important. Agents are obliged to carry out the wishes of a principal, whereas a fiduciary’s obligation is to exercise independent judgment on behalf of a beneficiary. Put differently, an agent is an order taker, whereas a fiduciary is expected to make discretionary decisions. Legally, directors have a fiduciary duty to act in the best interests of the corporation, which is very different from simply doing the bidding of shareholders.

 

2. The theory is out of step with ordinary usage: Shareholders are not owners of the corporation in any traditional sense of the term, nor do they have owners’ traditional incentives to exercise care in managing it.

 

This observation is even truer today than when it was famously made by Adolf Berle and Gardiner Means in their landmark 1932 study The Modern Corporation and Private Property. Some 70% of shares in U.S.-listed companies today are held by mutual funds, pension funds, insurance companies, sovereign funds, and other institutional investors, which manage them on behalf of beneficiaries such as households, pensioners, policy holders, and governments. In many instances the beneficiaries are anonymous to the company whose shares the institutions hold. The professionals who manage these investments are typically judged and rewarded each quarter on the basis of returns from the total basket of investments managed. A consequence is high turnover in shares, which also results from high-frequency trading by speculators.

The decisions of asset managers and speculators arise from expectations regarding share price over a relatively short period of time. As the economy passes through cycles, the shares of companies in entire industry sectors move in and out of favor. Although the shareholders of record at any given moment may vote on an issue brought before them, they need not know or care about the company whose shares they hold. Moreover, the fact that they can hedge or immediately sell their shares and avoid exposure to the longer-term effects of that vote makes it difficult to regard them as proprietors of the company in any customary sense.

The anonymity afforded the shares’ beneficial owners further attenuates their relationship to the companies whose shares they own. Some 85% of publicly traded shares in the United States are held in the name of an institution serving as an intermediary—the so-called street name—on behalf of itself or its customers. And of the ultimate owners of those shares, an estimated 75% have instructed their intermediaries not to divulge their identities to the issuing company.

 

3. The theory is rife with moral hazard: Shareholders are not accountable as owners for the company’s activities, nor do they have the responsibilities that officers and directors do to protect the company’s interests.

The problem with treating shareholders as proprietors is exacerbated by the absence of another traditional feature of ownership: responsibility for the property owned and accountability—even legal liability, in some cases—for injuries to third parties resulting from how that property is used. Shareholders bear no such responsibility. Under the doctrine of limited liability, they cannot be held personally liable for the corporation’s debts or for corporate acts and omissions that result in injury to others.

With a few exceptions, shareholders are entitled to act entirely in their own interest within the bounds of the securities laws. Unlike directors, who are expected to refrain from self-dealing, they are free to act on both sides of a transaction in which they have an interest. Consider the contest between Allergan and Valeant. A member of Allergan’s board who held shares in Valeant would have been expected to refrain from voting on the deal or promoting Valeant’s bid. But Allergan shareholders with a stake in both companies were free to buy, sell, and vote as they saw fit, with no obligation to act in the best interests of either company. Institutional investors holding shares in thousands of companies regularly act on deals in which they have significant interests on both sides.

In a well-ordered economy, rights and responsibilities go together. Giving shareholders the rights of ownership while exempting them from the responsibilities opens the door to opportunism, overreach, and misuse of corporate assets. The risk is less worrying when shareholders do not seek to influence major corporate decisions, but it is acute when they do. The problem is clearest when temporary holders of large blocks of shares intervene to reconstitute a company’s board, change its management, or restructure its finances in an effort to drive up its share price, only to sell out and move on to another target without ever having to answer for their intervention’s impact on the company or other parties.

4. The theory’s doctrine of alignment spreads moral hazard throughout a company and narrows management’s field of vision.

Just as freedom from accountability has a tendency to make shareholders indifferent to broader and longer-term considerations, so agency theory’s recommended alignment between managers’ interests and those of shareholders can skew the perspective of the entire organization. When the interests of successive layers of management are “aligned” in this manner, the corporation may become so biased toward the narrow interests of its current shareholders that it fails to meet the requirements of its customers or other constituencies. In extreme cases it may tilt so far that it can no longer function effectively. The story of Enron’s collapse reveals how thoroughly the body of a company can be infected.

The notion that managing for the good of the company is the same as managing for the good of the stock is best understood as a theoretical conceit necessitated by the mathematical models that many economists favor. In practical terms there is (or can be) a stark difference. Once Allergan’s management shifted its focus from sustaining long-term growth to getting the company’s stock price to $180 a share—the target at which institutional investors were willing to hold their shares—its priorities changed accordingly. Research was cut, investments were eliminated, and employees were dismissed.

5. The theory’s assumption of shareholder uniformity is contrary to fact: Shareholders do not all have the same objectives and cannot be treated as a single “owner.”

Agency theory assumes that all shareholders want the company to be run in a way that maximizes their own economic return. This simplifying assumption is useful for certain purposes, but it masks important differences. Shareholders have differing investment objectives, attitudes toward risk, and time horizons. Pension funds may seek current income and preservation of capital. Endowments may seek long-term growth. Young investors may accept considerably more risk than their elders will tolerate. Proxy voting records indicate that shareholders are divided on many of the resolutions put before them. They may also view strategic opportunities differently. In the months after Valeant announced its bid, Allergan officials met with a broad swath of institutional investors. According to Allergan’s lead independent director, Michael Gallagher, “The diversity of opinion was as wide as could possibly be”—from those who opposed the deal and absolutely did not want Valeant shares (the offer included both stock and cash) to those who saw it as the opportunity of a lifetime and could not understand why Allergan did not sit down with Valeant immediately.

 

The Agency-Based Model in Practice

 

Despite these problems, agency theory has attracted a wide following. Its tenets have provided the intellectual rationale for a variety of changes in practice that, taken together, have enhanced the power of shareholders and given rise to a model of governance and management that is unrelenting in its shareholder centricity. Here are just a few of the arenas in which the theory’s influence can be seen:

Executive compensation.

Agency theory ideas were instrumental in the shift from a largely cash-based system to one that relies predominantly on equity. Proponents of the shift argued that equity-based pay would better align the interests of executives with those of shareholders. The same argument was used to garner support for linking pay more closely to stock performance and for tax incentives to encourage such “pay for performance” arrangements. Following this logic, Congress adopted legislation in 1992 making executive pay above $1 million deductible only if it is “performance based.” Today some 62% of executive pay is in the form of equity, compared with 19% in 1980.

 

Disclosure of executive pay.

 

Agency theory’s definition of performance and its doctrine of alignment undergird rules proposed by the SEC in 2015 requiring companies to expand the information on executive pay and shareholder returns provided in their annual proxy statements. The proposed rules call for companies to report their annual total shareholder return (TSR) over time, along with annual TSR figures for their peer group, and to describe the relationships between their TSR and their executive compensation and between their TSR and the TSR of their peers.

Shareholders’ rights.

The idea that shareholders are owners has been central to the push to give them more say in the nomination and election of directors and to make it easier for them to call a special meeting, act by written consent, or remove a director. Data from FactSet and other sources indicates that the proportion of S&P 500 companies with majority voting for directors increased from about 16% in 2006 to 88% in 2015; the proportion with special meeting provisions rose from 41% in 2002 to 61% in 2015; and the proportion giving shareholders proxy access rights increased from less than half a percent in 2013 to some 39% by mid-2016.

The power of boards.

Agency thinking has also propelled efforts to eliminate staggered boards in favor of annual election for all directors and to eliminate “poison pills” that would enable boards to slow down or prevent “owners” from voting on a premium offer for the company. From 2002 to 2015, the share of S&P 500 companies with staggered boards dropped from 61% to 10%, and the share with a standing poison pill fell from 60% to 4%. (Companies without a standing pill may still adopt a pill in response to an unsolicited offer—as was done by the Allergan board in response to Valeant’s bid.)

Management attitudes.

Agency theory’s conception of management responsibility has been widely adopted. In 1997 the Business Roundtable issued a statement declaring that “the paramount duty of management and of boards of directors is to the corporation’s stockholders” and that “the principal objective of a business enterprise is to generate economic returns to its owners.” Issued in response to pressure from institutional investors, the statement in effect revised the Roundtable’s earlier position that “the shareholder must receive a good return but the legitimate concerns of other constituencies also must have the appropriate attention.” Various studies suggest ways in which managers have become more responsive to shareholders. Research indicates, for instance, that companies with majority (rather than plurality) voting for directors are more apt to adopt shareholder proposals that garner majority support, and that many chief financial officers are willing to forgo investments in projects expected to be profitable in the longer term in order to meet analysts’ quarterly earnings estimates. According to surveys by the Aspen Institute, many business school graduates regard maximizing shareholder value as their top responsibility.

Investor behavior.

Agency theory ideas have facilitated a rise in investor activism and legitimized the playbook of hedge funds that mobilize capital for the express purpose of buying company shares and using their position as “owners” to effect changes aimed at creating shareholder value. (The sidebar “The Activist’s Playbook” illustrates how agency theory ideas have been put into practice.) These investors are intervening more frequently and reshaping how companies allocate resources. In the process they are reshaping the strategic context in which all companies and their boards make decisions.

Taken individually, a change such as majority voting for directors may have merit. As a group, however, these changes have helped create an environment in which managers are under increasing pressure to deliver short-term financial results, and boards are being urged to “think like activists.”

The Activist’s Playbook

For an understanding of the agency-based model in practice, there is no better place to look than an activist campaign. As a first step, the activist acquires shares in the targeted company—typically somewhere between 5% and 10%, but sometimes less than 1%. Shares in hand, he then claims the right to issue directives. (To leverage that power, he will often alert other hedge funds to his actions.) The language of ownership typically plays a prominent role. For example, in 2014, to advance a takeover of Allergan by Valeant Pharmaceuticals, Bill Ackman, of Pershing Square Capital Management, attacked Allergan’s board for failing to do what the directors were paid to do “on behalf of the Company’s owners.” The activist may challenge the board’s professionalism by appealing to agency theory norms of directorship. In one letter to the Allergan board, Ackman declared: “Your actions have wasted corporate resources, delayed enormous potential value creation for shareholders, and are professionally and personally embarrassing for you.”

Although campaigns differ in their particulars, the activist’s playbook for increasing shareholder value is fairly standard. As our colleagues Ian Gow and Suraj Srinivasan (with others) have documented in their study of nearly 800 campaigns at U.S. companies from 2004 to 2012, activists tend to focus on capital structure, strategy, and governance. They typically call for some combination of cutting costs, adding debt, buying back shares, issuing special dividends, spinning off businesses, reconstituting the board, replacing the CEO, changing the strategy, and selling the company or its main asset. Tax reduction is another element of many activist programs.

 

An activist whose demands go unheeded may initiate a proxy fight in an attempt to replace incumbent board members with directors more willing to do the activist’s bidding. In a few instances, activists have even offered their chosen nominees special bonuses to stand for election or additional incentives for increasing shareholder value in their role as directors.

By most indications, hedge fund activists have been quite successful in effecting the changes they’ve sought. As reported by the industry, more companies are being targeted—473 worldwide in the first half of 2016 (including 306 in the United States), up from 136 worldwide in all of 2010—and activists’ demands are frequently being met. In the United States in 2015, 69% of demands were at least partially satisfied, the highest proportion since 2010. Activists are also gaining clout in the boardroom, where they won 397 seats at U.S. companies in 2014 and 2015. Although activist hedge funds saw outflows of some $7.4 billion in the first three quarters of 2016, assets under management were estimated at more than $116 billion in late 2016, up from $2.7 billion in 2000.