Agency Problems and Accountability of Corporate Managers and Shareholders

Agency Problems and
Accountability of
Corporate Managers
and Shareholders
8 OUTRAGEOUS EXECUTIVE
PERKS
1. 2 Million Birthday Party

2. Post-Mortem Non-Compete
3. Housekeeping
4. Flying School Bus
5. Tax-Free California
6. Flying Cash Cow
7. Super Security
8. Box Seats ‘Till Death
INTRODUCTION
RELEVANT LEGAL ISSUES FOR CORPORATE

SOCIAL RESPONSIBILITY
Concern whether and to what extent legal

rules should mandate or restrict mechanism of
Corporate Governance.
•It has no coherent meaning detached from the
specific mechanism by which corporations are
governed.
•The legal issue is not whether the corporation or
any individual who manage it should care about the
society.
•There is no question whether the parties of the

firm may contract to take society’s interest into
account.
•Corporate Social Responsibility is not whether the
managers should maximize the firm profits, but
rather in whose interest they should manage.
Agency
- is a relationship that came into
being occasioned by the existence of one
or more individual called principals, employ
one or more individuals called agents, to
carry out some service and then entrust
decision making rights to the agents.
Agency Problem in Corporate
Governance
An agency problem occurs when the
interests of stockholders, the board of
directors and/or the management of the
company are not perfectly aligned or when
these entities conflict.
Corporate Context
• Stockholders and BODs, Executives
and managers
Cascading Nature of Principal Agent
Relations
principal Shareholders
Board of Principal of
Directors
Executives Managers Auditors

Principal- Agent Specific Issues
1. Diversification vs. Dividends
2. Managerial Opportunism
3. Power Supremacy vs. Technical Expertise
4. Trust
Identified Agency Problems:
• Adverse Selection
-insufficiency of information
•Agency Cost
-resources to be sacrificed to keep an eye on
things
•Conflict of interest
-concerns or aims of two different parties are
incompatible
Moral Danger Problem- problems where agents
take unobserved actions against the principal interest
•Legal Requirement vs. Opportunistic
Behavior
Sarbanes–Oxley Act of 2002- Imposed new
regulation on public companies and their auditors.
•Self-interested Behavior
REMEDIES WITHIN SHAREHOLDERS
Proxy voting
-refers to an exercise of voting in behalf of
shareholders through the use of a special authority
given by the shareholder or principal.
-either another shareholder or a fund manager
is the one who would cast votes.
-its use is limited.
Right of Proxy
-right to vote in all instances but not having the
right to debate or otherwise participate in the
proceedings
Benefits of Proxy voting
1.Routine decisions
-they can vote for other minor things like
changes in company name
2. Governance
-vote for charter and amendment of by-laws
3.Issues on Anti-Takeover
-vote for proposals that necessitate
shareholder's confirmation of anti-takeover
measures
Derivative lawsuit
-lawsuit filed by a shareholder on behalf of
the corporation against a third party
Specific feature
-any reward of successful action will be
awarded to the corporation Process
1. Satisfy various requisites

2. Required to post a bond or other fees if
unsuccessful
TAKEOVER
Corporate takeover is the general term
referring to transfer of control of a firm from one
group of shareholders to another group of
shareholders.
TYPES OF TAKEOVER
Friendly Takeover Hostile Takeover

A hostile takeover can be done in many ways the
following are some of these:
•Tender Offer
•Proxy Fight
•Quietly purchasing enough stocks in the open
market, also known as creeping
•Reverse Takeover
•Tender Offers
FINANCING A TAKEOVER
Debt Financing
Partial or Full Equity Conversion
Share Swap/All Share Deal
EXTERNAL FORCES AFFECTING GOVERNANCE
Competitors
-corporations and other business entities
offering the same product
Financiers
-manages routinely huge amount of money
-lending money, project financing
Regulatory Agencies
-public authority responsible for exercising
autonomous authority
Watchdogs
-independent organization trying to police a
particular industry
Predators company
-corporations that are always in the watch,
waiting for a chance to take-over a certain company
-friendly or hostile
INFORMATION ENHANCERS,
PROVIDERS AND GATEKEEPERS
Gatekeepers
-Refers to independent third party persons
or entity whose cooperation is important because
they have the capability to at least deter, if not
prevent misconducts of corporations. They play
better crucial roles in our capital markets because
they are far better equipped to gather information
about companies than most investors, and their
investors trust and rely on them.
Enron, 2001
Houston-based energy trading
company was the 7th largest company in
the U.S. Through some fairly complicated
accounting practices that involved the use
of shell companies. The shell companies
run by Enron executives, recorded
fictitious revenues, essentially recording
one dollar of revenue, multiple times, thus
creating the appearance of incredible
earnings figures.
WorldCom, 2002
The equities market was rocked by
another billion-dollar accounting scandal. In
total, $3.8 billion worth of normal operating
expenses, which should all be recorded as
expenses but were treated as investments
and were recorded over a number of years.
In fact, the business was becoming
increasingly unprofitable.
Sarbanes-Oxley Act
This act was enacted in July 2002 to
restore investors’ confidence in the financial
markets and close loopholes that allowed
public companies to defraud investors. It had
a profound effect on corporate governance
in the U.S. This act requires public
companies to strengthen audit committees,
perform internal controls test, make
directors and officers personally liable for
accuracy of financial statements, and
strengthen disclosure.
INVESTMENT BANKER
Investment banker in an individual or

entity act as an agent for corporation issuing
securities.
ROLE OF INVESTMENT BANKER
 Origination (Investigation, Analysis and

Research)
 Underwriting (Public Cash Offering)
 Distribution
STOCK EXCHANGES
An entity which offers trading services and

facilities for stock brokers and traders, to buy and sell
shares of stock and other securities.
Also offer services for the issue and

redemption of securities as well as other financial
instruments including other arrangements such as
the payment of income and dividents.
SECURITIES TRADED:
•Shares issued by companies

•Derivatives
•Pooled investments
•Bonds
ROLE OF STOCK EXCHANGES
1. Raise Capital
2. Mobilize Savings
3. Facilities Growth
4. Distributes Profit
5. Improves Corporate Governance
6. Creates Opportunities for Small Investors
7. Facilitates Raising Capital for the
Government
8. Indicator of Economy
FINANCIAL PRESS
•Newspapers
•Magazines
•TV channels
•Broadcast programs
•Other media specializing in financial news and
updates
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Agency Problems and

1. 2 Million Birthday Party

RELEVANT LEGAL ISSUES FOR CORPORATE

Concern whether and to what extent legal

•There is no question whether the parties of the

Executives Managers Auditors

1. Diversification vs. Dividends

3. Power Supremacy vs. Technical Expertise

1. Satisfy various requisites

Friendly Takeover Hostile Takeover

Investment banker in an individual or

 Origination (Investigation, Analysis and

 Underwriting (Public Cash Offering)

An entity which offers trading services and

Also offer services for the issue and

•Shares issued by companies

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