Choice #1: Ethical Business Management Sometimes, in firms, the interest of the stockholders and that of management will diverge and misalign thereby resulting in mismanagement of the business. Such separation leads to what is known in the finance world as an agency problem. Moreover, one of the five principle foundations of finance is principle number five (5) which points out that a conflict of interest will cause this agency problem (Keown, Martin, & Petty, 2014). Presented is an analysis of this specific principle, why it is important, specific examples applicable in today’s business world, and recommendations for combatting such actions by managers.
Principle 5: Conflicts of Interest Cause Agency Problems When there exists a misalignment of shareholders and management interests, the result is classified as an agency problem. As presented by Chen, Lu, and Sougiannis, (2012) “agency problems are present when managers engage in activities for their own benefits rather than the benefits of the firm’s shareholders” (p. 252). Often times, this is …show more content…
One perfect example is the case of Air Products v. Airgas Inc. where Air Products wanted to acquire Airgas at a price of $70 per share when their trading shares were at $40-$50 dollars (Stout, 2012). While the majority of the shareholders supported the sale in order to boost their portfolio, the transaction did not take place. As it went to the Delaware Court for litigation, the court upheld the board of director’s stance that the organization was not obligated to make this transaction in order to maximize shareholder value in the short term realm (Stout, 2012). Even though a firm is supposed to exist for the maximization of shareholder wealth, in this case the board of directors argued that in the long run, the organization would be better served to stay the course and not sell off to Air
Principle 5: Conflicts of Interest Cause Agency Problems When there exists a misalignment of shareholders and management interests, the result is classified as an agency problem. As presented by Chen, Lu, and Sougiannis, (2012) “agency problems are present when managers engage in activities for their own benefits rather than the benefits of the firm’s shareholders” (p. 252). Often times, this is …show more content…
One perfect example is the case of Air Products v. Airgas Inc. where Air Products wanted to acquire Airgas at a price of $70 per share when their trading shares were at $40-$50 dollars (Stout, 2012). While the majority of the shareholders supported the sale in order to boost their portfolio, the transaction did not take place. As it went to the Delaware Court for litigation, the court upheld the board of director’s stance that the organization was not obligated to make this transaction in order to maximize shareholder value in the short term realm (Stout, 2012). Even though a firm is supposed to exist for the maximization of shareholder wealth, in this case the board of directors argued that in the long run, the organization would be better served to stay the course and not sell off to Air