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Alan Cring Productions in association with Emergent Light Studio presents

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the Illinois State Collegiate Compendium, academic lectures in business and economics.

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This is business finance, FIL 341 for Autumn Semester 2024.

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Today, the agency dilemma. I have a PowerPoint presentation, it's custom, it's my own,

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that is now in your files folder in Canvas, files, PowerPoints, agency.

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And that covers what I am doing in this particular lecture today,

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but it also spills into the one that I did on Tuesday as well.

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And we'll get to that very soon. Just a quick look at the numbers here.

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We're having a pretty serious down day right now.

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As you can see, let me turn on this projector here.

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The Dow is not down too much, down less than three quarters of a percent,

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but it gets pretty ugly down here with the S&P 500, it's down 1.65 percent,

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and the NASDAQ is down more than two and a half percent.

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This is not good news. And it indicates that there is a lot of concern in the markets in general.

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And a lot of that has to do with uncertainty.

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As you can see there, this is not a pleasant day.

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CRUDE has been bouncing around this session.

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It's still below $70 a barrel, so that's not much to worry about right there.

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But those numbers like that.

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Now really quickly here, let me look at the VIX,

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which is telling us about current volatility conditions.

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And now look at that, it's good green.

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That means it's up from yesterday, and it's been having some wavy spikes.

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And it's really, there's a lot of uncertainty.

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And although politics generally does not enter the stock market too much,

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a matter of fact, hardly much at all usually,

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this is a really kind of a different situation here today as we move toward the election.

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And we'll probably still have this volatility, uncertainty,

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going through tomorrow and Monday and also Tuesday

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as we shake out which of the candidates for the White House is going to actually prevail.

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We just have to wait and see how it plays out.

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Once there is, whichever one it is, you will see that volatility calm down.

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It's because certainty, this is essentially Schrodinger's cat.

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While the cat's in the box, we don't know whether it's alive or dead,

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so we have total uncertainty.

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But once the box is open and we know what the cat looks like,

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well, then other markets are going to say, okay, now we know more,

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and so we can move from there and adapt to whatever is going to happen with that new president.

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So there you are.

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That's where we are looking at right now.

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Now let me go back here just quickly.

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The most important thing to have a look at is the gold has taken a toilet break.

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It's dropped pretty noticeably.

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And that's a little surprising because usually gold gets excited,

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the gold bugs get excited if there's uncertainty and all of that.

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But for some reason, they are taking their profits and leaving the playing field for the day,

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whatever that means, and so is silver for that matter.

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But the 10-year bond, there was a sell-off last night after the bond market opened,

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after this bond thing opened, and sell-off, that was, of course, the price is going down,

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yields going up, but something turned the market around.

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About a few hours ago, maybe eight or so, nine o'clock, it just turned around.

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But suddenly there was a buy and a lot of buy, giving price support,

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and so the yields began to come back down.

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By the end of the day today, we may have a slight negative, a lowering of that yield there.

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Right now it's almost not even worth mentioning.

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It's 0.4 basis points.

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So right now it's pretty much flat for the day.

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And if it keeps falling like this, in other words, if it keeps buying pressure, pushing prices up,

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it'll probably go a little negative for the day today.

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And then coming over here, you've got the Nikkei.

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As usual, it drops in the opening, and then it had another drop, and I think from what I hear,

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from what I'm hearing is that was on concerns about North Korea fired an ICBM,

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an intercontinental ballistic missile, and it was more or less a successful test.

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And that's scaring the crap out of Japan, Korea, and other places in the eastern hemisphere.

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And so that seems to have been what caused that drop for a while.

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But then, you know, after all is said and done, it's North Korea.

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How many of these can they build?

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How many nations that they would target wouldn't be able to stop that missile in its flight if they did try to nuke?

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Now this ICBM can reach the United States, so that's a concern.

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And it's a concern here as well as it is in places like Japan, even Australia.

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So, you know, it's going to be a little, that adds a little bit of worry to the markets.

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That kind of some case running North Korea has now got a successful way to throw his toys at the rest of the world,

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pretty much the whole world.

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Although I don't think they are, they're Mark IV, so I don't think they can reach Europe.

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But still, they can reach us, and they can reach Japan and South Korea.

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So it's a worry, but we hope he's not crazy enough to try to use one,

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because we turned his whole country into a parking lot.

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But anyway, that's that.

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And then London, just a sour day.

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It just had a bare day, and there's not much we can say.

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It's been having a string of bare days.

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There are concerns about the British economy being weak and all of that.

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So the market over there is reacting.

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What's driving us down?

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There have been, I was reading a couple of analysts saying, why the hell is the market dropping like this?

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We've got strong numbers.

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We just had another report that it looks like inflation is going back down.

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It's pretty much what it usually used to be.

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So we shouldn't be worried about that.

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We've got strong consumer spending going into the holiday season.

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It's hard to tell what's going on.

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There is a little bit of a blemish right now in the housing market,

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and that's housing purchases, house purchases are down.

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There is actually, that might mean that, well, it might mean the consumers are worried about the future.

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But it also might mean that they are waiting for interest rates on mortgages to fall.

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So they're going to back off and see if the interest rates can get, say, down below 5% in the next few months.

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So it might not be as bad news as some are making it out to be.

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But anyway, why is the market going down so much when the news is almost all positive?

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GDP numbers were released yesterday.

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We're growing at 2.8%, which is a darn nice sustainable growth rate without inflation.

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It looks good.

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So hard to tell what's pissing off the markets and consumer sentiment,

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even though they're buying like blind trout right now.

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They are, consumers are saying, oh, it's just such a blah economy.

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It's terrible.

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You know, what's going on?

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What are they basing this on?

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Well, we can't figure it out yet.

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So one way or the other, that's where we are.

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Now, let me finish up this corporate governance.

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And I'm going to take it down the path of agency.

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Now, in the last lecture, and of course, I don't have a marker.

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Again, give me one second to get a marker, and I'll be right back.

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I've got to steal one.

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Ah, there we go.

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Good.

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Yes, we'll walk you around in this room.

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Okay.

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This is great meat for quizzes and exams,

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definitional kinds of questions and all of that.

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But I gave you the definition of an agent and a principal.

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Well, this marker really isn't doing me any good here.

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Let me see if I can find someplace else to steal a marker.

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Ah, damn it.

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No markers, no markers.

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Come on.

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Really?

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Oh, that's right.

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Fuck.

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Well, I'll just have to do this on the overhead.

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Apologies for that.

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Let me get back to this.

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Okay.

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Let me do this on a Word document,

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and then I can just upload the Word document anyway.

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So, that's fine.

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Word.

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Open.

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Okay.

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Dark mode.

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Cool.

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So, we're going to make a big font for us to see.

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Okay, and then we'll view zoom to page width.

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Okay.

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Now, as I had said, I gave you the definitions of a principal

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and principal.

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Really?

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I'll get back here.

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Principal and an agent.

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Now, remember that the agent is the principal is the person

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whose wealth or welfare is to be maximized.

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And the agent is the person who's charged with maximizing

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that principal's welfare.

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And that gives you an idea of how these arrangements work.

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In fact, so, for example, the doctor is the agent of the patient.

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The child is the principal.

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And the parent is the agent.

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And when we think about it this way,

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the board of directors is the agent of the shareholders

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of a corporation.

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Framing it this way, most contractual arrangements involve,

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well, many if not most, involve an agency relationship.

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In one way or another, someone is a principal and the other party,

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the counterparty, is the agent in these relationships.

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And that carries with it a lot of implications.

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But before I go on to the main point, the agency dilemma,

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I want to stop for a moment and talk about contracts.

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And I was a little bit surprised at some of the things

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I used to teach business law that were important for business to know.

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There's one critical in this lecture,

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and it's not taught anywhere anymore,

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even though it will bite you in the butt if you don't know what it is.

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But starting off, now understand that when I say contracts,

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now contracts can be written or they can be oral.

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No, not verbal.

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Verbal means oral or written.

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So contracts can be either.

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An oral contract is not defective.

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It is not less than a written contract.

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That's something that is kind of a myth.

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Oh, we want this in writing.

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No, oral contracts are just as good.

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And in some cases, so for example, if I go in and you are the cashier at McDonald's,

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you say, may I McHelp you McPlease?

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And I say, McYes.

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Now, I should McLike that McBurger up there on your menu board,

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and you say, why McCertainly?

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A contract has been formed.

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It's an oral contract.

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There's nothing wrong with it.

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It is the most common kind of contract there is.

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Now, there's an offeror and an offeree.

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Now, the offeror, okay, who's making the offer here?

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Are you making the offer?

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Is McDonald's making the offer or am I making the offer?

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Actually, no.

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That sounds crazy, but you are not making the offer because an offer has to be explicit in terms of timing,

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the amount, the number of units, and the total value.

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You're just putting up an advertisement.

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Unless it is very specific, I am the offeror and you are the offeree,

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and by saying McYes, McCertainly, then you have accepted my offer.

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And then, so that's the first thing, offer and acceptance must be in a contract.

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Offer and acceptance.

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The second thing is, I'm going to give you money and you're going to give me a burger.

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Thing of value for thing of value.

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That is crucial to a contract.

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Now, think about that one.

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It turns out that you, madam, are my daughter.

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So I give you a gift of a car.

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And then I find out that you've hooked up with a guy named Nick who drives motorcycles and he robs banks.

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And I say, well, I'm going to take that car back and you say, no, you aren't fat boy.

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And I'm going to say, actually, I've got a contract with you.

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You said you would behave and you say, screw you.

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You see, the problem with that is that a gift is not a contract.

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A gift cannot be.

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So if, for example, I offer you an engagement ring, animal,

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and then we break off the engagement, I say, you give me that ring back.

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And you say, no, bitch, I want that ring back.

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You say, no, it was a gift.

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There was no thing of value for thing of value involved.

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You say, well, I gave you love.

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Oh, bullshit.

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Quit it.

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That's not good enough.

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It's not an explicit thing.

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There was not a thing of value for a thing of value involved in it.

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So it falls apart on a contract right there.

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Now, it's still an agreement possibly, but a contract is higher than an agreement.

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It's more specific.

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Now, the next one is capacity.

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Both parties have to be capable.

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Generally speaking, a miner cannot be held to a contract.

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They can enter a contract, but they can revoke the contract at will.

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That's why you don't want to take too many liberties with selling anything to a miner,

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because they can invalidate the contract.

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In other words, it is voidable.

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It is voidable.

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And also, one last thing about contracts is they have to be legal.

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Their legality has to be involved.

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It has to be a legal transaction.

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It has to be legal.

242
00:18:56,000 --> 00:19:03,000
So we have offer and acceptance, thing of value for thing of value, capacity, and legality.

243
00:19:03,000 --> 00:19:07,000
Those are the four parts of a contract.

244
00:19:07,000 --> 00:19:21,000
Now, I'm going to make a distinction here, and it sounds a little bit odd, but it's important.

245
00:19:21,000 --> 00:19:31,000
In the Western world and all over the world, we actually see two kinds of law.

246
00:19:31,000 --> 00:19:36,000
Now, in some countries, one law dominates altogether.

247
00:19:36,000 --> 00:19:40,000
In others, the other kind of law dominates.

248
00:19:40,000 --> 00:19:58,000
These two types of law are what are called statutory law, and the other kind is called common law.

249
00:19:58,000 --> 00:20:07,000
Statutory law is law that is written in ink, as it were, or electronic bytes these days.

250
00:20:07,000 --> 00:20:12,000
Thou shalt by this book not do.

251
00:20:12,000 --> 00:20:15,000
That's statutory.

252
00:20:15,000 --> 00:20:22,000
The most biggest example would be Roman law, lex romana, the law of the Romans.

253
00:20:22,000 --> 00:20:34,000
Nothing was left to chance as the Roman Empire proceeded through the early, through the several centuries BCE

254
00:20:34,000 --> 00:20:38,000
and into the post BCE era.

255
00:20:38,000 --> 00:20:41,000
That law book became enormous.

256
00:20:41,000 --> 00:20:44,000
It became insanely burdensome.

257
00:20:44,000 --> 00:20:51,000
There were jokes among lawyers while this guy came to me, and he had a case that he wanted me to help him with.

258
00:20:51,000 --> 00:21:01,000
But his case is on page 1823 paragraph B, and I specialize in paragraph C, so I couldn't help him.

259
00:21:01,000 --> 00:21:03,000
That was how bad it was.

260
00:21:03,000 --> 00:21:07,000
But it was monstrously influential.

261
00:21:07,000 --> 00:21:16,000
Wherever the Roman Empire went, it imposed lex romana, the law of the Romans.

262
00:21:16,000 --> 00:21:26,000
In fact, even after the Roman Empire fell, the Visigoths took the law.

263
00:21:26,000 --> 00:21:31,000
They didn't understand it, and it kind of turned into a giant hodgepodge for a couple of centuries.

264
00:21:31,000 --> 00:21:36,000
But lex romana became lex romana visigothas.

265
00:21:36,000 --> 00:21:39,000
It was that powerful.

266
00:21:39,000 --> 00:21:46,000
So anywhere you go where Rome was hanging around, dominating, there you had it.

267
00:21:46,000 --> 00:21:49,000
Especially if they'd been there for quite a while.

268
00:21:49,000 --> 00:21:58,000
So France, Spain, and a number of other countries, they have statutory law because they got it from the Romans.

269
00:21:58,000 --> 00:22:00,000
To this day, it's statutory law.

270
00:22:00,000 --> 00:22:08,000
In fact, there is one place, one state in the United States that is pure statutory law.

271
00:22:08,000 --> 00:22:14,000
It's Louisiana, because it's basically French, and a lot of delicious food that gives me cramps.

272
00:22:14,000 --> 00:22:17,000
But anyway, so there you have it.

273
00:22:17,000 --> 00:22:19,000
Now the other kind of law is common law.

274
00:22:19,000 --> 00:22:21,000
This is tribal law.

275
00:22:21,000 --> 00:22:34,000
The Germans, the Africans, many in the Asian theater, the Native Americans, and the British,

276
00:22:34,000 --> 00:22:39,000
because they had been populated by the Anglo-Saxons and the Yutis.

277
00:22:39,000 --> 00:22:43,000
And even when the French, and there was a problem.

278
00:22:43,000 --> 00:22:51,000
The French, at the Battle of Hastings, the French won over the Anglo-Saxon forces.

279
00:22:51,000 --> 00:22:56,000
And then the French tried to impose statutory law.

280
00:22:56,000 --> 00:22:58,000
England was common law.

281
00:22:58,000 --> 00:23:02,000
What came out of it was a frickin' mess.

282
00:23:02,000 --> 00:23:09,000
Which came over here to the United States when the crazies in Britain were chased out

283
00:23:09,000 --> 00:23:13,000
and they started colonizing the United States.

284
00:23:13,000 --> 00:23:20,000
So we have a bizarre combination of statutory law and common law here.

285
00:23:20,000 --> 00:23:24,000
You see, common law is the law of the elders.

286
00:23:24,000 --> 00:23:28,000
We decided something many centuries ago.

287
00:23:28,000 --> 00:23:33,000
And over time, you respect what the elders decided.

288
00:23:33,000 --> 00:23:40,000
Now it does have a very slow, it has an ability to adapt.

289
00:23:40,000 --> 00:23:46,000
But it is still based upon this term in Latin.

290
00:23:46,000 --> 00:23:50,000
It's called stare decisis, or decisis.

291
00:23:50,000 --> 00:23:54,000
Stare decisis, respect the precedent.

292
00:23:54,000 --> 00:23:59,000
In other words, we are based on what has been decided before.

293
00:23:59,000 --> 00:24:03,000
So our law is very much involved in that.

294
00:24:03,000 --> 00:24:09,000
There's so much of common law in our books.

295
00:24:09,000 --> 00:24:19,000
So for example, well the Constitution says, actually the Constitution is irrelevant.

296
00:24:19,000 --> 00:24:23,000
What is relevant is constitutional law.

297
00:24:23,000 --> 00:24:28,000
What the courts have decided the Constitution says.

298
00:24:28,000 --> 00:24:31,000
That is what is relevant.

299
00:24:31,000 --> 00:24:34,000
We cannot refer back directly to the Constitution.

300
00:24:34,000 --> 00:24:36,000
That's originalist thinking.

301
00:24:36,000 --> 00:24:40,000
But you want to talk about the body of constitutional law?

302
00:24:40,000 --> 00:24:45,000
It takes up literally petabytes of server space.

303
00:24:45,000 --> 00:24:48,000
All of the common law.

304
00:24:48,000 --> 00:24:57,000
The common law decided by judges, decided by the appellate courts, decided by the Supreme Courts of the United States over the many years.

305
00:24:57,000 --> 00:24:58,000
And that's how it works.

306
00:24:58,000 --> 00:25:00,000
So we have statutory law.

307
00:25:00,000 --> 00:25:03,000
A law will be written, or something will be in the Constitution.

308
00:25:03,000 --> 00:25:12,000
But it has no meaning until it is adjudicated by a court.

309
00:25:12,000 --> 00:25:14,000
Now many are not adjudicated.

310
00:25:14,000 --> 00:25:19,000
We just sit there and say statutory law stands because no one takes it through the court system.

311
00:25:19,000 --> 00:25:21,000
Or the court system says, I don't want to do that.

312
00:25:21,000 --> 00:25:30,000
But ultimately everything is subject to judicial review.

313
00:25:30,000 --> 00:25:34,000
Now that came about, it came early.

314
00:25:34,000 --> 00:25:52,000
The Supreme Court of the United States in I think 1787 took on the case Marbury v. Madison.

315
00:25:52,000 --> 00:25:56,000
And that was where judicial review was established.

316
00:25:56,000 --> 00:26:05,000
The Supreme Court said, no, if there's a law, we get to adjudicate its constitutionality.

317
00:26:05,000 --> 00:26:21,000
That set it so that we would be essentially, statutory law stands until the court decides whether it is constitutional or not.

318
00:26:21,000 --> 00:26:23,000
So there's where we sit.

319
00:26:23,000 --> 00:26:28,000
But the Christian law is important to us because in a lot of our business,

320
00:26:28,000 --> 00:26:36,000
we are facing a kind of combination of statutory law, but also common law is playing in.

321
00:26:36,000 --> 00:26:39,000
And so we have to accept that.

322
00:26:39,000 --> 00:26:50,000
And ultimately, the ultimate law of us in our lives, and especially in business, comes from common law.

323
00:26:50,000 --> 00:26:52,000
And I'll get to that in just a minute here.

324
00:26:52,000 --> 00:26:55,000
And that's why this almost ultimate.

325
00:26:55,000 --> 00:27:03,000
Now what I'm going to get to is a type of duty that's called fiduciary.

326
00:27:03,000 --> 00:27:05,000
Fiduciary duty.

327
00:27:05,000 --> 00:27:16,000
Black's law dictionary says that fiduciary duty is the highest law implied.

328
00:27:16,000 --> 00:27:24,000
Fiduciary duty is the highest implied.

329
00:27:24,000 --> 00:27:27,000
Now when they say implied, that means common law.

330
00:27:27,000 --> 00:27:29,000
It's not written.

331
00:27:29,000 --> 00:27:34,000
States, countries, they'll say, well, this is fiduciary.

332
00:27:34,000 --> 00:27:36,000
So what?

333
00:27:36,000 --> 00:27:38,000
Fiduciary law is deeper.

334
00:27:38,000 --> 00:27:46,000
It is so ancient that we find it in the roots of the first languages in the world, all over the world.

335
00:27:46,000 --> 00:27:48,000
It is that well understood.

336
00:27:48,000 --> 00:27:49,000
We'll get to that in a minute.

337
00:27:49,000 --> 00:28:09,000
But first of all, let me now get you to the agency dilemma.

338
00:28:09,000 --> 00:28:30,000
An agent has incentive to maximize its own welfare instead of that of the principal.

339
00:28:39,000 --> 00:28:43,000
The agent is supposed to maximize the wealth of the principal.

340
00:28:43,000 --> 00:28:51,000
But every agent, every agent has an incentive to take care of itself.

341
00:28:51,000 --> 00:28:54,000
Every agent does.

342
00:28:54,000 --> 00:29:02,000
I don't care if you're the most religious agent on earth, you're the most dutiful, you have the incentive.

343
00:29:02,000 --> 00:29:10,000
And in business, we have to assume that agency dilemma is present.

344
00:29:10,000 --> 00:29:13,000
And it is everywhere.

345
00:29:13,000 --> 00:29:22,000
This incentive to do what's right for yourself instead of what's right for the one you're supposed to take care of.

346
00:29:22,000 --> 00:29:31,000
And in business, this is the operating principle for a good corporate government.

347
00:29:31,000 --> 00:29:43,000
As the late President Ronald Reagan said of nuclear test ban treaties with the Soviet Union, trust but verify.

348
00:29:43,000 --> 00:29:49,000
And in our world, in business, we have to liquidate this.

349
00:29:49,000 --> 00:29:54,000
In other words, turn it into actual dollar value.

350
00:29:54,000 --> 00:29:56,000
So what does that mean?

351
00:29:56,000 --> 00:30:04,000
That means that we have to face costs that are driven by agency.

352
00:30:04,000 --> 00:30:08,000
And there are five of those.

353
00:30:08,000 --> 00:30:13,000
Agency costs.

354
00:30:13,000 --> 00:30:31,000
The first one is perquisites, otherwise known as perks.

355
00:30:31,000 --> 00:30:48,000
Agency costs extracted because of position.

356
00:30:48,000 --> 00:30:53,000
This is the executive who has a desk that you could land small jets on.

357
00:30:53,000 --> 00:31:00,000
This is the C-suite that has a private plane to fly from city to city for their meetings

358
00:31:00,000 --> 00:31:10,000
when they could take Greyhound and they could stay in a Motel 6, would they stay in a five-star Weston.

359
00:31:10,000 --> 00:31:15,000
That's the first one, perquisites, because you have position.

360
00:31:15,000 --> 00:31:17,000
You take.

361
00:31:17,000 --> 00:31:20,000
And that you're taking from the principle.

362
00:31:20,000 --> 00:31:26,000
By taking those, you're spending money that isn't yours.

363
00:31:26,000 --> 00:31:28,000
Well, I need a nice chair for my office.

364
00:31:28,000 --> 00:31:32,000
I'm important. My butt feels better when I decide better.

365
00:31:32,000 --> 00:31:34,000
No, you're taking.

366
00:31:34,000 --> 00:31:36,000
That's an agency cost.

367
00:31:36,000 --> 00:31:43,000
The next one is called shirking.

368
00:31:43,000 --> 00:31:52,000
That is avoiding duties.

369
00:31:52,000 --> 00:31:55,000
Shirking is everywhere.

370
00:31:55,000 --> 00:32:05,000
My favorite example of shirking comes from a consulting job I did some years ago in a place quite a way, long way, long, long way from here.

371
00:32:05,000 --> 00:32:11,000
There was a corporation and I was at dinner one night.

372
00:32:11,000 --> 00:32:19,000
Early on they took me out to dinner and there were different C-suite and some upper middle level managers there.

373
00:32:19,000 --> 00:32:25,000
There were a couple of lower level employees that they always took a few.

374
00:32:25,000 --> 00:32:27,000
It was a nice thing to do.

375
00:32:27,000 --> 00:32:35,000
There was this one upper level middle manager, upper middle level manager, and they were just talking.

376
00:32:35,000 --> 00:32:37,000
He made this comment.

377
00:32:37,000 --> 00:32:39,000
He said, my desk is clear every night.

378
00:32:39,000 --> 00:32:43,000
I get it all done so I can go home and my desk is clear.

379
00:32:43,000 --> 00:32:58,000
Then right away one of these administrative assistants that they brought along, she just leans over to me and she says, yeah, because he takes all the work off his desk and he puts it on his employees, his underlings' desks after they leave.

380
00:32:58,000 --> 00:33:00,000
That's why his desk is clear.

381
00:33:00,000 --> 00:33:06,000
Then we come in in the morning and we have hell to face because we've got to fix everything that he left behind.

382
00:33:06,000 --> 00:33:08,000
That's shirking.

383
00:33:08,000 --> 00:33:15,000
Shirking is, of course, the five minute smoke break that turns into 20 minutes.

384
00:33:15,000 --> 00:33:20,000
Shirking is there was another company.

385
00:33:20,000 --> 00:33:24,000
Every morning there was this one account executive.

386
00:33:24,000 --> 00:33:27,000
He'd come breezing in right on time, 8 o'clock every morning.

387
00:33:27,000 --> 00:33:37,000
He'd sweep past the receptionist desk, grab the Wall Street Journal off her counter, and then he'd go into the executive toilet and he'd shit for 40 minutes.

388
00:33:37,000 --> 00:33:39,000
Literally, we timed him.

389
00:33:39,000 --> 00:33:41,000
Every day.

390
00:33:41,000 --> 00:33:48,000
That man was so regular, he should have been a model for how to go to the toilet every day at the same time.

391
00:33:48,000 --> 00:33:50,000
40 minutes.

392
00:33:50,000 --> 00:33:52,000
But hey, I came in on time.

393
00:33:52,000 --> 00:33:54,000
That's shirking.

394
00:33:54,000 --> 00:33:57,000
Shirking can be subtler, too.

395
00:33:57,000 --> 00:34:05,000
It's when you don't work at a pace as quickly as you could because you just like to take it easy at your job.

396
00:34:05,000 --> 00:34:07,000
That's shirking.

397
00:34:07,000 --> 00:34:09,000
There are all kinds of places shirking happens.

398
00:34:09,000 --> 00:34:22,000
In any event, you are taking from the principles that time is money and you're taking that money away from the owners of the corporation.

399
00:34:22,000 --> 00:34:36,000
Now the next one is direct theft.

400
00:34:36,000 --> 00:34:40,000
Stealing. Just stealing.

401
00:34:40,000 --> 00:34:48,000
Now this is a surprisingly large thing.

402
00:34:48,000 --> 00:34:51,000
I just went upstairs and grabbed myself a couple of pens.

403
00:34:51,000 --> 00:34:57,000
I like the Pilot pens that they have in the storage cabinet in the Department of Finance, Insurance, and Law.

404
00:34:57,000 --> 00:34:59,000
I took three.

405
00:34:59,000 --> 00:35:00,000
I needed one.

406
00:35:00,000 --> 00:35:02,000
But they're nice pens.

407
00:35:02,000 --> 00:35:04,000
Now if you repeat this, I will hunt you down.

408
00:35:04,000 --> 00:35:06,000
That's simple.

409
00:35:06,000 --> 00:35:10,000
But stealing happens all the time.

410
00:35:10,000 --> 00:35:13,000
It happens in many different subtle ways.

411
00:35:13,000 --> 00:35:22,000
A long time ago I was working with some cost control consultants, this husband and wife pair.

412
00:35:22,000 --> 00:35:24,000
They educated me.

413
00:35:24,000 --> 00:35:29,000
I mean it was just amazing the things that you can see that are stolen.

414
00:35:29,000 --> 00:35:33,000
Once they enlightened me and they said watch.

415
00:35:33,000 --> 00:35:35,000
And I thought oh my God.

416
00:35:35,000 --> 00:35:38,000
Things like that.

417
00:35:38,000 --> 00:35:40,000
But that one's.

418
00:35:40,000 --> 00:35:48,000
And then you have lying.

419
00:35:48,000 --> 00:35:50,000
Lying is everywhere.

420
00:35:50,000 --> 00:35:51,000
We all lie.

421
00:35:51,000 --> 00:35:54,000
Most of our lives are white lies.

422
00:35:54,000 --> 00:35:57,000
And they don't hurt anybody per se.

423
00:35:57,000 --> 00:36:03,000
But in the work environment, lying is a surprisingly large problem.

424
00:36:03,000 --> 00:36:04,000
I had a manager.

425
00:36:04,000 --> 00:36:09,000
She said how are you doing on these Excel sheets that I gave you last week?

426
00:36:09,000 --> 00:36:11,000
Well I'm almost done.

427
00:36:11,000 --> 00:36:15,000
Well she just went into his files folder and she found out he was lying.

428
00:36:15,000 --> 00:36:17,000
He hadn't even started.

429
00:36:17,000 --> 00:36:18,000
Lying.

430
00:36:18,000 --> 00:36:19,000
Okay.

431
00:36:19,000 --> 00:36:20,000
Well okay.

432
00:36:20,000 --> 00:36:23,000
The student who says well I'm feeling really sick.

433
00:36:23,000 --> 00:36:26,000
I'm not going to come to class today because I'm sick.

434
00:36:26,000 --> 00:36:28,000
Well sometimes it's true.

435
00:36:28,000 --> 00:36:29,000
Sometimes they're just lying.

436
00:36:29,000 --> 00:36:30,000
They don't want to come to class.

437
00:36:30,000 --> 00:36:31,000
Things like that.

438
00:36:31,000 --> 00:36:33,000
I've had examples.

439
00:36:33,000 --> 00:36:37,000
One time I had a kid whose grandmother died twice during the semester.

440
00:36:37,000 --> 00:36:40,000
He forgot that he had given that excuse before.

441
00:36:40,000 --> 00:36:45,000
And those are, I mean damn your grandma comes back from the dead.

442
00:36:45,000 --> 00:36:46,000
Shit I'd shoot her again.

443
00:36:46,000 --> 00:36:48,000
She's probably a zombie.

444
00:36:48,000 --> 00:36:49,000
Double tap.

445
00:36:49,000 --> 00:36:52,000
But that kind of stuff does happen.

446
00:36:52,000 --> 00:36:58,000
And it is part of you, again, don't assume intentions.

447
00:36:58,000 --> 00:37:00,000
You act on capabilities.

448
00:37:00,000 --> 00:37:03,000
So sometimes I come off like an asshole in the classroom.

449
00:37:03,000 --> 00:37:04,000
No.

450
00:37:04,000 --> 00:37:07,000
I want to see documentation.

451
00:37:07,000 --> 00:37:09,000
I've got Excel certificates.

452
00:37:09,000 --> 00:37:13,000
I want everyone to get certified in Excel in FIL 240.

453
00:37:13,000 --> 00:37:14,000
So what have I got?

454
00:37:14,000 --> 00:37:16,000
I've got certificates that are faked.

455
00:37:16,000 --> 00:37:18,000
I know where they're getting them faked.

456
00:37:18,000 --> 00:37:25,000
And it's kind of easy once you know how to do it to tell them it's a fake cert.

457
00:37:25,000 --> 00:37:32,000
So they're just going to get their hundred points for that term assignment.

458
00:37:32,000 --> 00:37:33,000
And they're not going to do the work.

459
00:37:33,000 --> 00:37:35,000
And you ask them, well did you really do this?

460
00:37:35,000 --> 00:37:36,000
Oh yeah.

461
00:37:36,000 --> 00:37:38,000
Okay.

462
00:37:38,000 --> 00:37:47,000
Now the last one, incompetence.

463
00:37:47,000 --> 00:37:56,000
Have you ever worked with someone who was as dumb as a box of rocks and that is actually disrespecting rocks?

464
00:37:56,000 --> 00:38:02,000
You have to fix their mistakes one over the other after the other.

465
00:38:02,000 --> 00:38:04,000
They're nice people usually.

466
00:38:04,000 --> 00:38:06,000
They're just dumb Fs.

467
00:38:06,000 --> 00:38:10,000
And you're going to have to deal with their mess.

468
00:38:10,000 --> 00:38:13,000
Others will have to clean up what they've done.

469
00:38:13,000 --> 00:38:19,000
Incompetence is actually something that happens all the time.

470
00:38:19,000 --> 00:38:27,000
But a lot of people, there's, many years ago there was a management guru named Dr. Peter.

471
00:38:27,000 --> 00:38:31,000
And he had something called the Peter Principle and he published a book.

472
00:38:31,000 --> 00:38:34,000
And people thought it was just kind of like a joke.

473
00:38:34,000 --> 00:38:40,000
But it's actually, we understood very soon that it wasn't a joke.

474
00:38:40,000 --> 00:38:44,000
You don't have to remember this, but I'm not going to test you on it.

475
00:38:44,000 --> 00:38:47,000
But what he wrote was the Peter Principle.

476
00:38:47,000 --> 00:38:54,000
Every employee rises to his or her level of incompetence.

477
00:38:54,000 --> 00:38:57,000
When you're good at something, you'll rise.

478
00:38:57,000 --> 00:38:59,000
You're good at that, you'll rise.

479
00:38:59,000 --> 00:39:04,000
Until the point where you rise to a position that you cannot do.

480
00:39:04,000 --> 00:39:06,000
And then you'll stay there.

481
00:39:06,000 --> 00:39:11,000
That is pervasive in C-suites.

482
00:39:11,000 --> 00:39:19,000
People who were good when they were at a lower level and they just kept getting promoted until they hit the C-suite and then they can't do it anymore.

483
00:39:19,000 --> 00:39:23,000
Another place where we see it a lot is in sports.

484
00:39:23,000 --> 00:39:28,000
Someone who was a good coach at the high school level and then he was a good coach at the college level,

485
00:39:28,000 --> 00:39:32,000
then a good assistant coach at professional level.

486
00:39:32,000 --> 00:39:36,000
He gets to be the coach at the national level and he sucks.

487
00:39:36,000 --> 00:39:37,000
He is terrible.

488
00:39:37,000 --> 00:39:42,000
He has an O and infinity season one after the other.

489
00:39:42,000 --> 00:39:45,000
We see those all the time.

490
00:39:45,000 --> 00:39:49,000
So incompetence is out there.

491
00:39:49,000 --> 00:39:51,000
Now for the last round.

492
00:39:51,000 --> 00:40:11,000
That agency principle up there, you have to appreciate that it is not the agent's job to monitor and enforce his own behavior.

493
00:40:11,000 --> 00:40:14,000
That is the principal's job.

494
00:40:14,000 --> 00:40:22,000
The principal is what we call the respondeat superior, not the underlings.

495
00:40:22,000 --> 00:40:24,000
This is common law.

496
00:40:24,000 --> 00:40:26,000
It's called vicarious liability.

497
00:40:26,000 --> 00:40:30,000
That will be in your PowerPoint so you don't need to worry about writing it down.

498
00:40:30,000 --> 00:40:32,000
Vicarious liability.

499
00:40:32,000 --> 00:40:33,000
It ends at the top.

500
00:40:33,000 --> 00:40:36,000
It ends at the top at the principal level.

501
00:40:36,000 --> 00:40:38,000
Well, he did that and we told him not to.

502
00:40:38,000 --> 00:40:40,000
Well, it was your job to monitor and enforce.

503
00:40:40,000 --> 00:40:44,000
So the lawsuit is on you, Cupcake, not on him.

504
00:40:44,000 --> 00:40:46,000
That's how it works.

505
00:40:46,000 --> 00:40:57,000
And that's why it is your job as a principal to watch them because it's not their job.

506
00:40:57,000 --> 00:41:07,000
In almost all situations, there's only one situation, one type of agency where that's not true.

507
00:41:07,000 --> 00:41:10,000
In general, it's the principal's job.

508
00:41:10,000 --> 00:41:21,000
But what happens if the agent has, the principal has some fundamental defect that prevents him or her from monitoring and enforcing?

509
00:41:21,000 --> 00:41:27,000
In other words, there's some reason why the principal can't be held.

510
00:41:27,000 --> 00:41:31,000
That's a special kind of relationship.

511
00:41:31,000 --> 00:41:41,000
It's called a fiduciary relationship.

512
00:41:41,000 --> 00:41:53,000
A fiduciary relationship is one where the agent must monitor and enforce on himself.

513
00:41:53,000 --> 00:41:55,000
Think about the child-parent relationship.

514
00:41:55,000 --> 00:42:02,000
The child is the principal, but how is the child supposed to monitor and enforce the performance of the parent?

515
00:42:02,000 --> 00:42:06,000
The doctor-patient relationship.

516
00:42:06,000 --> 00:42:08,000
The patient is the principal, the doctor is the agent.

517
00:42:08,000 --> 00:42:13,000
But how is a patient supposed to know so much about medicine?

518
00:42:13,000 --> 00:42:15,000
There's a fundamental defect in that.

519
00:42:15,000 --> 00:42:16,000
Same with a lawyer.

520
00:42:16,000 --> 00:42:21,000
Lawyer is the agent and the client is the principal.

521
00:42:21,000 --> 00:42:25,000
But the client doesn't know the law.

522
00:42:25,000 --> 00:42:33,000
These are relationships that transcend the normal business environment.

523
00:42:33,000 --> 00:42:42,000
In fact, even the board of directors is in a fiduciary position because the shareholders, yes, they're supposed to monitor and enforce,

524
00:42:42,000 --> 00:42:46,000
and to some extent they can through the voting process every year.

525
00:42:46,000 --> 00:42:50,000
But they can't do it at the granular level.

526
00:42:50,000 --> 00:42:53,000
They're not allowed to go in and watch what the accountants are doing.

527
00:42:53,000 --> 00:42:57,000
They're not allowed to go in and watch what the operations managers are doing.

528
00:42:57,000 --> 00:43:01,000
So there is another fiduciary relationship.

529
00:43:01,000 --> 00:43:04,000
This is the one that, and this is in your PowerPoint.

530
00:43:04,000 --> 00:43:09,000
Black's Law Dictionary says it's the highest duty implied by law.

531
00:43:09,000 --> 00:43:12,000
Fiduciary.

532
00:43:12,000 --> 00:43:19,000
Now fiduciary relationships are characterized by three pillars.

533
00:43:19,000 --> 00:43:35,000
Trust, royalty, and fidelity.

534
00:43:35,000 --> 00:43:39,000
They are the highest of your duties.

535
00:43:39,000 --> 00:43:43,000
A marriage is a fiduciary relationship.

536
00:43:43,000 --> 00:43:47,000
Remember that the partners are the agents.

537
00:43:47,000 --> 00:43:49,000
The marriage is the principal.

538
00:43:49,000 --> 00:43:51,000
But the marriage is just a contract.

539
00:43:51,000 --> 00:43:54,000
It can't monitor and enforce.

540
00:43:54,000 --> 00:44:03,000
Its life depends upon the agents monitoring and enforcing themselves.

541
00:44:03,000 --> 00:44:12,000
The parent and the child relationship depends upon the parent monitoring himself or herself.

542
00:44:12,000 --> 00:44:19,000
The board of directors must monitor and enforce its own behavior.

543
00:44:19,000 --> 00:44:21,000
That's corporate governance.

544
00:44:21,000 --> 00:44:33,000
How do we get a board of directors to monitor and enforce its own highest values in its actions for the shareholders?

545
00:44:33,000 --> 00:44:40,000
How do we get soldiers to take care of, monitor and enforce their own behavior to protect the Constitution?

546
00:44:40,000 --> 00:44:51,000
How do we get the President and the Congress to monitor and enforce their own behaviors to protect and advance the welfare of the citizens?

547
00:44:51,000 --> 00:44:53,000
These are fiduciary relationships.

548
00:44:53,000 --> 00:44:57,000
And you will be in some of these as you get older.

549
00:44:57,000 --> 00:45:07,000
These are the heart and soul of being the good corporate citizen of this 21st century.

550
00:45:07,000 --> 00:45:10,000
And so that's where this lecture ends.

551
00:45:10,000 --> 00:45:13,000
Be that good citizen.

552
00:45:13,000 --> 00:45:19,000
Fiduciary duty was the duty of the Knights, the great Knights of the Medieval period.

553
00:45:19,000 --> 00:45:27,000
They were supposed to protect the Crown even as they were thousands of miles away from the castle.

554
00:45:27,000 --> 00:45:31,000
They protected the Crown and they protected its interests.

555
00:45:31,000 --> 00:45:34,000
Be the Knights of our century.

556
00:45:34,000 --> 00:45:35,000
That's all I have for you.

557
00:45:35,000 --> 00:45:37,000
I thank you.