Agency relationship between government and the shareholders, Finance Basics

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Agency Relationship between Government and the Shareholders

Shareholders and via extension, the company they own operate within the environment requiring the charter or license granted through the government.  Such government will expect the company and via extension its shareholders to activate the business in a manner that is beneficial to the complete the society and economy.

In this agency relationship the government is the principal whereas the company is the agent.  So it becomes an agent when it has to gather tax on behalf of the government particularly withholding tax and PAYE.

The company carries on business also on behalf of the government since the government does not have sufficient capital resources.  It offers conductive investment environment for the company and share in the benefit of the company in form of taxes.

The company and its shareholders as agents may obtain some actions which might prejudice the position or interest of the government like the principal.  These actions comprises as:

  • Tax evasion: This comprises the failure to provide the exact picture of the profits or earnings of the firm to minimize tax liability.
  • Involvement in illegal business activities through the firm.
  • Lukewarm answer to social responsibility calls via the government.
  • Lack of sufficient interest in the safety of the staff and the products and services of the company involving lack of environmental awareness concerns via the firm.
  • Avoiding certain categories and areas of investment coveted via the government.

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