When an individual receives the authority to act on behalf of another, they are known as principal agents. A principal gives the authority, by way of investment or contract, to the principal agent. A contract is arranged in order to set up the guidelines on how the agent acts on behalf of the principal.
An example of a principal-agent relationship is how the shareholders of a corporation are investing within the entity, while the entity performs its duties of raising profits and becoming more productive. The principal in this situation are the shareholders, and the corporation acts as the principal agent. The shareholders may cancel the contract at any time, but while they are the principals, they elect officials within the corporation through a voting system which they have been given the right to do.
An issue may occur based on the conflict of interest between the two parties. An example being, if the corporation needs to take one route for its benefit, and at the same time, the stock of the corporation may go down, which negatively affects the interests of the shareholders.
There is no set goal on which the principal may be satisfied since they are hiring an agent in order to do what they specialize in. The agent in this case is to perform to his or her maximum ability in order to satisfy the principal. The only way the principal may feel dissatisfaction is if their interest within the agent depreciates.
A principal agent has a fiduciary duty towards the principal. The duties of an agent include the following: (1) To perform the tasks specified within the terms of the contract to the best of their ability, while the principal agents do not have the authority to perform acts on behalf of the principal that are not stated within the agreement; (2) An obligation to relieve his obligations with due diligence and care; (3) The duty of avoiding any conflict of interest, not only between the two parties specified in the contract, but also any conflict which they may incur even though it is not stated within the agreement.
A principal agent is not to perform any additional duties which may conflict with a prior obligation to which he or she has committed. The main issue within the principal agent relationship directly involves the lack of full disclosure. The principal has the duty to update the agent on any information which relates to the transaction or the tasks the agent has on hand. The agent must do the same, and the agent has an extra obligation of not increasing his interest without increasing the principal’s. If an agent is acting on behalf of a principal, the agent must make sure the increase in interest between the two is relative.