Business Associations I
8/20/2007
Managing “Fanchester United”
50K soccer fans own the team, make decisions by online voting
Problems: Fans know little about soccer compared to coach or manager, on the flip-side, coach can set the agenda, can present options most favorable to him (salary – 1M vs. 1.5M, both could be too much).
At the mercy of the coach?
Why do we have so many businesses with numerous owners (shareholders)?
It is tough to raise a lot of money for one individual, even then they don’t want to put it all in one investment, so you need a lot of people to accumulate that money.
Can you think of other systems for managing a team with many owners?
Veto power for shareholders, some proposals don’t go to a vote – depending on the issue
GM – people could vote on him, he supervises, makes sure that coach is accountable
Committee among 50,000 – board of directors, shareholders pick them, don’t run team, just make sure that coach is accountable
To be continued…
Agency costs (coach abusing position)
Democratic management vs. republican management
Placing BA in context:
Coordinating between the people that have the required resources
Ideas
Capital
Skills
Raw materials
Demand for product
Components of business law
Commercial law
Governs the business transactions
Foundations course: contracts
Regulatory Law
Governs government intervention in running a business
Ad. Law, antitrust,
Corporate Law
Governs the cooperative framework between stakeholders in the business
BA I
Course page:
http://home.law.uiuc.edu/~aviram/
Exam:
Dec. 10
Open book
Essay – 2 out of 3
Four hours
Length limit:
1600 words (800 per question)
Email before meeting with Aviram, room 326.
Why do we need corporate lawyers?
Fighting over the pie – get lawyers to get the most pie
Does this make sense?
Lawyers arms race leaves only lawyers as winners
How is representing a party to a corporate transaction different from representing an injured party in torts?
Not a zero sum game – it is a matter of degree, both can benefit from this
Expanding the pie – adding value to the transaction
Reducing transaction costs – costs of reaching and executing an agreement
Search costs
Bargaining costs
Enforcement costs
Transaction costs are the economic equivalent of friction, costs involved in human transaction over time
Opportunism (hold outs)
A newspaper wants to outsource its printing functions
See slides (23)
Integration: a solution to opportunism
Slide 26 – she is going to shirk, do just enough to keep her job, she also may be looking to move up, she also may take pride in her work
The problem of integration
Separation of ownership and control – the newspaper owns the product Jane produces, Jane determines the quality of the product.
This is bad for the newspaper. Is it bad for Jane?
What can the paper do to ensure Jane works hard?
Incentives, raises, bonuses
Agency Costs – monitoring
Monitor Jane’s inputs
Problems?
Why aren’t punch clocks used to monitor professors?
Monitor Jane’s outputs
Problems?
Benchmark – how do we know what is good? She could just come in and work just over the benchmark, just enough to keep her job
Proportionality to efforts – might depend on the machine malfunction, Jane could have worked very hard, she doesn’t have any control, so she doesn’t work very hard
Bonding – actions that align Janes incentives those of the newspaper
Successful bonding will result (slide 30)
Agency costs are the sum of:
Monitoring expenditures
Bonding expenditures
Residual loss
Transaction cost trade off
See slide 35
Eliminate misunderstandings, lawyers should speak the same language, think about negative scenarios and address them (managers suffer from optimism bias)
Read Gorton an Cargill p. 1-12.
8/21/07
Capital; debt and equity
A firms capital is divided into two types, debt and equity
Debt – money given to the firm in return for repayment of a specific amount in the future
Equity – money given to the firm in return for a right to the assets the firm has left after if paid off all of its debt
Two important elements in comparing investments: risk and return
Return = what we have at the end – what we started with
See slides on comparing investments
Rate of return = divide the return with the investment yo made. To translate teo percent, multiply by 100
(5/100) x 100 = 5%
Comparing Investments – the risk of an investment
John starts lawn mowing business, gets a loan from a bank (debt)
John gambles and succeeds – see slides on risk
Slide 53 – bondholder – don’t take risks
Shareholder – take risks
Basic conflict between bondholders and shareholders, or debt vs. equity holders (who call the shots) – bondholders have contractual rights that protect their interest
CEO of Acme. She hires Bob as Sales manager, Bob hires Carol as a salesperson (rest. 1.04(8), 3.15)
1.04(8) Subagent: A subagent is a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal and for whose conduct the appointing agent is responsible to the principal. The relationship between an appointing agent and a subagent is one of agency, created as stated in 1.01.
3.15 Subagency: (1) A subagent is a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal and for whose conduct the appointing agent is responsible to the principal. The relationships between a subagent and the appointing agent and between the subagent and the appointing agent’s principal are relationships of agency stated in 1.01.(2) An agent may appoint a subagent only if the agent has actual or apparent authority to do so.
Is Ally an agent? Of whom?
Agent of the corporation, the board tells her what to do
Is Bob an agent? Of whom?
He is a sub-agent, acting on behalf of Ally and the corporation. Carol is a sub-sub-agent.
Types of authority (2.01, 2.03)
2.01 Actual Authority: An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.
2.03 Apparent Authority: Apparent authority is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.
Regarding a specific action of A:
Manifestations by P to A/T
Cause A/T to believe that P wishes A to so act
This belief is reasonable
Actual authority (P>>A)
Dean tells professor to teach class
Apparent Authority (P>>T)
Why do we need Apparent Authority?
Did the dean tell me Aviram is the BA professor? We are the third party, A is the Agent of the dean or law school or whatever, there is apparent authority. manifestation is implied, dean is not here shooing Aviram away, we have been caused to believe that P wishes A to so act.
