Lehman Brothers Agency Problem of the Board of Directors

Running head: BUSINESS LAW
BUSINESS LAW
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Author Note:

1BUSINESS LAW
Issues:
The case study involved in the present assignment is the Lehman Brothers’ agency
problem of the board of directors (Staff, 2017). The issue in this case is that whether the board of
directors has performed their duties.
Rules involved:
The main rules involved for the successful working of any corporate company are the
appropriate agency relationship in the company and secondly, proper functioning of the board of
members.
The agency relationship is created when a principal gives legal authority to an agent to
act on behalf of the principal when the agent will be dealing with the third party (Joslin &
Müller, 2016). The agency relationship is often called as a fiduciary relationship as it depends on
trust, faith and good conscience (DeMott, 2018). The agency problem occurs when the agent
does not act in accordance to the principle of agency; he works for his own interest and not for
the best interests of the principal.
When the agent works on behalf of the principal, he is likely to have better information of
the company. The principal on the other hand is left in dark as he is unaware of the activities of
his agent. This type of agency relationship is often found in the board of directors of a company
where the director of the company acts as the agent and the shareholder is the principal.
The agency problem is often created by the board. A large public company has several
share holders and their composition changes by minute in the stock market. It is very difficult for

2BUSINESS LAW
the shareholders to run the company. Hence, they hire the directors and even third parties to
work on behalf of them. The role of the directors is to monitor and motivate the management on
behalf of the shareholders. Their role also includes looking after the company’s external audit,
setting the compensation strategy for executives, evaluating the processes and governance
structure of the company, nominating new directors and making decisions for distributing the
dividends.
According to the US Corporate law, the main duty of the board of directors is to manage
the business and affairs of a corporation (Bruner, 2017). While performing their duties, they
must act in the interest of the company and they must perform their duty to care and loyalty. As
per Black’s Law of Dictionary, a relationship where a person is under a duty to act on behalf of
the other using high standard of care and trust is termed as fiduciary relationship (Hook, 2017).
Once elected, the directors are empowered with duties to act for the shareholders. They
have two main duties to perform, firstly, the duty to take care and secondly, the duty of loyalty.
The directors besides being honest and diligent, must be careful too while performing their
duties. The duty of loyalty means the directors must work for the best interest of the company
and the shareholders.
When they are appointed, they maintain a close relation with the executives than with the
shareholders. The reason being they meet with the executives almost regularly and thus develop
a friendly internal relation with them. Moreover, the directors’ job securities lie in the hands of
the executives, who can remove the directors at their sweet will. Hence, the job assurance of the
directors is mainly controlled by the executives and the directors who are the agents of the
company and not on the principals represented by the shareholders.