Company Principals: Reading Into Responsibilities

Sean Ross is a strategic adviser at 1031x.com, Investopedia contributor, and the founder and manager of Free Lances Ltd.

Principals have different roles that depend on the nature of an individual business, but the universal responsibility of a commercial business principal bears a significant influence. Some principals are also the founder, owner, and CEO of the business. Others own a large portion of company equity and sign off on major decisions.

Some principals are simply considered major parties to a business transaction. Many legal documents designate a "principal," the majority of which refer to someone with decision-making authority.

Principals have different roles depending on the company, but generally, the main function is to manage relationships and wield influence.

The Different Roles of a "Principal"

A principal is a term with many meanings. As it relates to business, a principal can range from a company's representative dealing with a contractor to the company's leader.

Some companies have a specific position identified as the principal, and these positions often represent key members of the leadership team. Principals may handle client and business relationships, as well as develop the mission and strategic vision for the firm. For smaller companies, the president, CEO, owner and principal are often the same person.

In legal terminology, the principal might be the party who gives legal authority for another party called the "agent" to act on the principal's behalf. These principals can be individuals, corporations, or even government agencies.

The last type of principal is the principal investor or the investor who owns the most shares of the company. This is normally the owner or some other member of the leadership team.

Key Takeaways

• A principal is essentially another name for a company owner or member; at some corporations, the principal is also the founder, CEO, or even the chief investor.
• The principal of a company can also grant the authority for an agent to act on behalf of the principal in a legal capacity, such as in the principal-agent relationship.
• While the role of a principal varies per company, the main tasks include managing client and business relationships and helping direct the company's vision.

The Principal's Function

In almost every circumstance, the company principal's major responsibility is managing relationships. Specifically, they handle client relationships, tend to business relationships, and work to develop the company's strategic mission and long-term vision.

This is most obvious in principal-agent transactions, wherein the principal is also responsible for compensating the agent and offering indemnification. In a principal-agent relationship, one entity legally determines that another will act on its behalf. Specifically, the agent acts on behalf of the principal and must do so without a conflict of interest.

All principals, however, act as representatives of a company's interest and are, in that way, ambassadors for the company.

1. Harvard Business Review. “Strategic Planning in Diversified Companies.”
2. Melissa Randall. “Fundamentals of Business Law – 15.3: Duties of Agents and Principals,” Page 1. Community College of Denver, 2020.
3. Harvard Business School Online. “4 Business Strategy Skills Every Business Leader Needs.”

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