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Agency Theory
The main problem in the case is that the CEO, Mr. Rodriguez, did not uphold his duty of care to the shareholders. Agency theory holds that the management of a company is an agent of the shareholders and should undertake actions that support the improvement of shareholder wealth at the firm. There are several points where this did not take place. The company's strategy of being a low-cost provider may have worked initially but it eventually became apparent that the company was suffering a decline in sales. The response of Mr. Rodriguez was to leave the strategy unchanged. Worse, he undertook significant misconduct and failed to safeguard the interests of the shareholders by giving luxurious bonuses to the staff and using company funds to finance his high-flying lifestyle. His action to call for an increase in the revenues from the accounting department was illegal, and directly misleading, and absolutely against the best interests of the shareholders.
The Board of Directors is responsible for oversight of the officers of the company. At best, they were negligent in this duty, which again is a breach of the agency agreement. The BOD needed to be aware of the slumping sales, be aware of Mr. Rodriguez's illegal and unethical actions and needed to take action. Even with the lousy strategy, the role of the...
In each of these cases, the agency agreement between the shareholders and the Board, and the shareholders and the CEO, was subject to breach, with the result being that the shareholders would eventually find their wealth eliminated.
2. The situation needed to be prevented at the level of the Board. It is the role of the Board to ensure that the company is being run well. Thus, the Board needs to be aware of what the company is doing, how it is competing and how it is spending the money. There clearly was no real interest on the part of the Board to address this situation. The Board relied on financial reports provided by the officers, and the auditor. It took at least five years for the Board to hire a new auditor and by then it was too late to safeguard the shareholders' wealth. The Board should have been able to determine the CEO's failings much earlier and taken steps to deal with the problem many years previous.
There are other issues here as well. Regulators are supposed to be willing to act in situations where illegal activities are taking place, as this securities fraud clearly was illegal. The regulators seemed unaware that the officers and…
Agency Theory and Executive Compensation An Analysis of Agency Theory and Aligning Executive Stock Options with Corporate Objectives According to Jensen and Meckling (1976), any medium- or large-sized firm today is not directly managed by its owners (the shareholders) but rather by "hired hands" that is, professional managers. Presumably, these professionals are capable and diligent agents of the owners, but these professionals' interests are not always the same as the shareholders' interests.
In extreme cases, managers might manipulate the price of stock to improve their own financial future, releasing falsely positive reports to net a gain, and then selling shares before the real truth about the company's poor financial health becomes known. 3. Finally what can be done to insure that we will have a greatly reduced probability of agency issues with the management of FF&F, Inc. Linking pay to performance has been
Introduction Agency theory is a theory explicating the relationship between the shareholders, who act as the principals, and the managers, who act as the agents. Within this relationship, the principal either employs or delegates an agent to carry out work and take actions in the best interests of the principal (Scott and O’Brien, 2003). Imperatively, when the decision-making power and authority is delegated to another party, this can result in a loss
agency theory in the light of management conflict with shareholders and issues pertaining to compensation packages for executives. It has 10 sources. Management role as agency and their relationship with shareholders often result in conflict of interest where executive compensation is concerned. While on the one hand management is keen on developing the company through its qualified CEOs, shareholders are more interested in their returns. As a result there exist
The Political Nature of the Federal Budget Process Introduction The federal budget process is overseen by US Congressmen, who are fundamentally immersed in the political nature of government. As Elwood (2008) notes, members of Congress are influenced in three ways: 1) by money that is used to finance their political campaigns; 2) by obtaining the votes necessary for reelection; and 3) by obtaining expert advice on topics that are of personal importance
Airline Deregulation There are many questions about whether the deregulation of the airlines was a success or not. Some assert that it was a "great success" due to the lower fares that were realized by a lot of airline passengers. However, whether that is really true will be explored. There is also a question of whether there could be some downsides to airline deregulation. Finally, there will be an offering and