The Separation of Ownership and Control — The Origin of the Agency Problem

The moment those who provide the capital and those who deploy it are separated, their interests begin to diverge. This is the agency problem. The duties the Companies Act imposes on officers are built to contain that divergence. This piece returns to the statutory text to read, from the starting point of the separation of ownership and control, why those duties fall on officers at all.

01When Those Who Provide Capital and Those Who Deploy It Are Separated

A stock corporation can function even when the people who put up the capital and the people who run it are different. Shareholders provide the funds but do not manage day to day. Officers run the business, yet the capital is the shareholders' money. If investment and management were held in a single pair of hands, no divergence of interest would arise. But the moment the two are split, what each side wants no longer lines up exactly.

Shareholders want the value of the company to grow. The officers entrusted with management, meanwhile, may carry other motives — self-preservation, private gain. The interests of those who provide the capital (the principal) and those who deploy it (the agent) diverge. This is the agency problem. The Companies Act's rules on officers are built on the premise of this structural gap.

02Article 330 of the Companies Act — An Officer Is a Mandatary Holding "Other People's Money"

The legal core of the separation lies in Article 330 of the Companies Act. That article defines the relationship between the company and its officers (directors, company auditors, and the like) as a mandate. A mandate is a relationship in which one person entrusts the handling of affairs to another. An officer is a mandatary who holds the company's property — funds the shareholders provided — and acts on the company's behalf.

As a mandatary, an officer cannot place personal interest ahead of the company's. The mandate carries with it the duty of care of a prudent manager under Article 644 of the Civil Code, the responsibility to handle the entrusted affairs with due care. The single fact that one is holding other people's money is the starting point for the heavy discipline placed on officers.

03The Fences Against Betrayal — Articles 355 and 356

Where there is separation, temptation arises for the mandatary: using company money for oneself, dealing with the company in a way that profits oneself, taking the company's business opportunities for oneself. The law closes off these routes in advance.

Article 355 of the Companies Act sets out the duty of loyalty: a director must comply with laws and regulations, the articles of incorporation, and resolutions of the general meeting of shareholders, and must perform their duties faithfully for the company. Article 356 further requires the approval of the general meeting of shareholders or the board of directors when a director engages in a transaction that competes with the company (competing business) or a transaction in which the director's interests conflict with the company's. These are the fences that keep a mandatary from betraying the mandator. Why are they needed? Because where there is separation, the gap keeps arising structurally. Rather than hope temptation never appears, you close off the routes by which it would. That is the logic of discipline.

04Agency Cost — Monitoring Is Not Free

Containing the gap requires monitoring and disciplining officers. But that monitoring has a price. This is called agency cost.

Checks by the board, disclosure to shareholders, verification through audits — each is a mechanism for keeping the gap small, and each is, at the same time, a cost. The point is that this cost cannot be driven to zero. As long as separation exists, monitoring is required, and monitoring carries expense. So the task of management and governance is not to "eliminate the cost" but to search for the optimal point that minimizes the combined burden of value destruction and monitoring expense.

05From the Capitalist's View to Materials Review — Separation Is Why Discipline Is Needed

This structure maps directly onto the ground beneath materials review. The floor that creates the materials, the management that approves them, and beyond that the shareholders who put money into the company. Here too there is a separation of ownership and control, and a divergence of interest lurks within it. The motive to rush short-term sales and the imperative to protect the company's long-term trust do not always point the same way.

Materials review is one of the mechanisms for monitoring this gap — a concrete part of the agency cost. Inspecting materials with an independent eye and leaving a record is the work of assuring that management, the mandatary, has not betrayed the shareholders, the mandator. Separation is why discipline is needed. When a reviewer is asked "why is this inspection and this record required?", being able to trace the causation back this far means explaining it from the structure rather than reciting the rules. The design of compensation and evaluation that steers officers' motives, incidentally, is continuous with the discussion of risk and return in the previous installment (Vol. 4); in the next, Vol. 6, we will check with the text of the Companies Act what shareholders actually can — and cannot — do.