Questions On Ethical Business Management Essay

1358 Words May 9th, 2016 6 Pages
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 because management makes business decisions with their own best interest at heart instead of what is best for the business. Managers will take this option in order to save their jobs, increase their salaries, or save face with superiors. One of the biggest agency problems is called “empire building” where managers will over grow the business by increasing human capital to a greater extent than the business can support (Chen,…

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