This course

1
This course

• Agency
• Limited liability
• Governance
• Partnership
• Close corporation
• Public corporation
• Other
• Management power as to third parties
• Fiduciary duties

2
Other business courses

• Business Associations 2
• Derivative suits
• Insider trading
• Takeovers
• Finance
• Securities Regulation
• Securities Litigation
• Unincorporated business entities

3
Problems of corporate governance

• Bounded rationality
• Transaction costs
• Shirking
• Agency costs
• Opportunism
• Risk

4
Making and selling a product (e.g., cell phone)
Design/patents
Electronics (chips)
casing
transport
transport
Assembly
transport
Marketing/sales
Warehouse
transport
Customer
5
A solution the big corporation
Board (policy and monitoring)
Top executives
Middle managers
Divisions Manufacturing, freight, sales
Assets factories, trucks, stores
employees
Shareholders
6
The shirking problem
Assume worker gets 50 for moving an office 5 do
it faster for 100
20 20 20 20 20
Work
Pay _at_20
20 20 20 20 20
7
Work 0 25 25 25 25
Pay 20 20 20 20 20 Profit(loss)20 (5)
(5) (5) (5) Exchange rate 1 util 1
8
Work0 0 0 0 0 Pay0 0 0 0 0
9
The entrepreneur
Pay entrepreneur 90 of the extra 50 11
11 11 11 11 45
10
Agency costs
Pay (cop) 90 of the extra 50 11
11 11 11 11 45 OR
Four workers earn 80 for firm and one worker
earns 20 for cop 11 11 11 11 36 20 11
11
An alternative back to contracts
Contract suppliers Flextronics Fedex Tiger Infosys
Customers
Internet
The firm Patents Brand name
12
Alternative standard forms

• General partnership
• Corporation
• Close corporation
• Other partnership forms

13
Some issues

• Entity vs. aggregate
• Regulation vs. contract
• State vs. federal regulation