Agency Theory Case Study

Excerpt from Case Study :

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
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strategy, the role of the BOD is to ensure that the firm has competent management, and should have either worked with the CEO to create better strategy or taken steps to replace the CEO. 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…

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"Agency Theory" (2012, February 20) Retrieved January 27, 2021, from

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"Agency Theory", 20 February 2012, Accessed.27 January. 2021,