Last update 31/07/2019
A party that is primarily engaged to act on behalf of, and for the benefit of, another party (the principal) and therefore does not control the investee when it exercises its decision-making authority.
The definition is derived from agency theory.
In company law, the directors act as agents of the company. The board of directors as a whole, and individual directors, have the authority to bind the company to contractual agreements with other parties. Since most of the powers to act on behalf of the company are given to the board of directors, the directors (and the management of a company) have extensive powers in deciding what the company should do, what its objectives should be, what its business strategies should be, how it should invest and what its targets for performance should be.
The powerful position of the directors raises questions about the use of this power, especially where the owners of the company (its shareholders) and the directors are different individuals:
- How can the owners of the company make sure that the directors are acting in the best interests of the shareholders?
- If the directors act in ways that the shareholders do not agree with, what can the shareholders do to make the directors act differently?
As agents of the company, directors have a fiduciary duty to the company. A fiduciary duty is a duty of trust. A director must act on behalf of the company in total good faith, and must not put his personal interests before the interests of the company. If a director is in breach of this fiduciary duty he could be held liable in law, if the company were to take legal action against him. Legal action by a company against a director for breach of fiduciary duty would normally be taken by the rest of the board of directors or, possibly, a majority of the shareholders acting in the name of the company.
