Essay about Ethical Challenges and Agency Issues

Generally, under-performing companies are the prime targets of hostile takeovers, so it makes sense that aligning shareholder and executive goals is a major way to avoid that. One popular way of aligning these goals is through the use of elaborate, structured compensation plans for executives which directly tie an executive’s salary to the performance of the company, usually and specifically its stock price (Megginson & Smart, 2009). These compensation plans have become the norm for American corporations, and their effectiveness in solving the agency problem is debatable. On one hand, it should drive an executive to strive to maximize the shareholder wealth, and it also helps companies to attract and retain the best available managers. On the other hand, it serves to sometimes wildly inflate the compensation paid to these executives, either by corporations trying to stay competitive for the best talent, or through easily achievable goals and uncapped maximums. The structured plans, if done correctly, are an effective way to help insure the goal of wealth maximization, but they are also by definition agency costs. Hence, agency problems are inherent to our American corporate system.

An ethical dilemma is an incident that causes us to question how we should react based on our beliefs. A decision needs to be made between right and wrong. I have experienced many ethical dilemmas in my lifetime, so I know that there is no such thing as an ethical dilemma that only affects one person. I also know that some ethical dilemmas are easier to resolve than others are. The easy ones are the ones in which we can make decisions on the spot. For example, if a cashier gives me too much change, I can immediately make a decision to either return the money or keep it. Based on Kant’s, categorical imperative there are two criteria for determining moral right and wrong. First, there is universalizability, which states, “the person’s

An ethical dilemma is defined as a complex situation that will often involve an apparent mental conflict between moral imperatives in which to obey one would result in transgressing another . When individuals are faced with an ethical question, we tend to search for a “correct answer” when responding. However, these types of questions do not always seem to have a straightforward answer. The arguments which may arise from an ethical dilemma question are typically examined in two ways: whether people are being consistent in their judgment and whether the alleged facts on which those judgments are based are truth. In this essay, the ethical dilemma being presented is as followed: A man cheats on his wife early in their marriage. Twenty years

In light of the recent financial catastrophes, there appears to be an increasing desire for ethical dealings in business. Maxwell suggests that there is currently a trend in the marketplace that seems to be placing more value on integrity, taking a longer view of strategies, and setting more realistic or conservative goals, though the jury is still out regarding the effectiveness of implementation and execution in changing the corporate money-making climate. Despite the Sarbanes-Oxley Act of 2002, which sets the standard for corporate accountability and penalties for wrongdoing, some experts believe the responsibility for maintaining an ethical environment is up to management (Jackson, 2005).

Please review the following scenario and respond to the questions that follow using a minimum of 300 words.

Managers can be encouraged to act in the stockholders' best interests through incentives, constraints, and punishments. These methods, however, are effective only if shareholders can observe all of the actions taken by managers. A moral hazard problem, whereby agents take unobserved actions in their own self-interests, originates because it is infeasible for shareholders to monitor all managerial actions. To reduce the moral hazard problem, stockholders must incur agency costs.

Executive compensation together with corporate governance systems has received an increasing amount of attention- from the press, corporations, financial academics and also the government. An executive compensation plan is a major application of the agency theory study and, thus, an agency contract between the shareholders and CEO’s of the business, which attempt to align the interests of the owners and the managers by basing the CEO’s or executive’s compensation on some performance measure of the managers expended effort in operating the organization. Over the last decade scandals such as the Enron and WorldCom have raised many issues and discussion as

The first reason for the perception that the financial sector may be more unethical is because of all the financial scandals the public has heard of since the late 1990’s. The watershed event that brought the ethics of finance to prominence at the beginning of the twenty-first century was the collapse of Enron Corporation and its accounting firm Arthur Andersen. The many financial scandals relayed by the media brought into focus the necessity of changes in the corporate finances; however, it also brought the perception of an unethical financial sector. The financial sector is big and extremely profitable; Human nature does not trust financial advisors who work with large amount of money and perceive them as greedy and selfish.

As the existence of productivity development and large-scale production, principal-agent relationship is widespread in various areas. However, when management and ownership in a company are separate, this action leads to the rising agency problems. The manager who makes the decisions prefers to develop the company in order to maximize their self-interest while those shareholders’ best interests may differ from the manager’s wish. Without efficient measures, the actions of agents are more likely to harm principal’s interests eventually.

The Fundamental Agency Problem and Its Mitigation • 3 Early on, three principal approaches were developed to minimize the agency problem. One, the "independence" approach, suggested that boards of directors, comprised to be independent of management, can monitor managers and assure that their interests do not diverge substantially from those of owners (Fama, 1980; Fama & Jensen, 1983a, 1983b; Jensen & Meckling, 1976; Mizruchi, 1983; see also Chandler, 1977). Another method, the "equity" approach, proposed that managers with equity in the firm were more likely to embrace the interests of other equity holders and, accordingly, to direct the firm in their joint interests (Fama & Jensen, 1983b; Jensen & Meckling, 1976). Lastly, there was the notion of the "market for corporate control," which set forth the principle that corporate markets may operate to discipline managers who inappropriately leverage their agency advantage. In such cases, self-serving executives may subject the firm to acquisition by other firms (Fama & Jensen, 1983a; Jensen & Ruback, 1983; Manne, 1965). While these three corporate governance approaches are rational in principle, the efficacy of these approaches in practice remains subject to debate. Accordingly, in subsequent sections of this manuscript, we provide a multidisciplinary overview of agency theory with an emphasis on the three mechanisms through which the fundamental agency

Business practices need to practice ethics of the highest order when carrying out the various business practices. Security and investment Companies as organizations need to ensure that in every practice or engagement they involve in, they get to deal with the clients and other parties with the highest integrity. Failure to provide ethical practices and integrity in all one does lead to breaches of set laws, which govern the operations of the company. Additionally, a company needs to

Agency theory presumes that shareholders will employ CEO’s who work to achieve shareholder objectives, but also suggest that agents avoid risk, are egoistic and may have their own agenda. Shareholders struggle to control CEO’s who generally have deeper knowledge of the business and can direct company resources to meet their objectives. To help align objectives, shareholders should monitor CEO activities and establish incentives that encourage the achievement of shareholder objectives. Since shareholders lack full transparency within the company, they must rely on incentives that relate to visible results

Agency problem was first mentioned by Berle and Means (1932) and has been since examined in both practice and academic literature. (3) Any contractual relationship, which one party (agent) promises to the other party (principle), is potentially subject to an agency problem. (11) In general, company’s ownership and control separate into three parties: the shareholders (principle), board of directors, and managers (agent). The shareholders are the owner of the entity and have the power to the operation profit and return of assets. The board of directors has the right to ratify and control the decision-making. The managers are responsible for the daily operations and execute decision made by the board of directors on behalf of the shareholders. Certainty, managers (agent) can collect information easier than shareholders (principle) do. If there is difference between the personal interests of agent and the goals of principles, the agency problem may present.(10) Agent can take advantage of power or information asymmetric to pursue its own interest instead of the best interest of principle.

The agency problem may also arise between top management and junior management and lower level employees. As is the case between top management and shareholders, employees may seek goals that might differ from the shareholder 's goals and even with the management goals. For example, an employee may want to follow his career path in another department and puts pressure to move from his current position. That may be in conflict with the interests of his current manager to keep him in that position for a longer period because he will have a hard time finding a replacement immediately. Another example could be if the employee seeks the benefit of being a top manager but on his way of doing so he might align his goals towards management goals instead of maximizing shareholder 's value. This problem could also be solved by close monitoring and by compensation packages tied to share performance.

The debate regarding corporate governance can be traces to the early 1930’s with the most notable publication being ‘The Modern Corporation and Private Property’ by AdolfBerle and Gardiner Means. In their publication, Berle and Means noted that despites presence of wide dispersion of ownership of firms’ and the subsequent separation of control and ownership there did not exist any check to control the executive autonomy awarded to corporate managers. Their ideas now known as the agency theory are concerned about the possibility of agents employed as professional executive to act on the behalf of business owners, serving their own interests and not those of the principals. This theory asserts that in order to deal with this problem,shareholders must incur ‘agency costs’. ‘Agency costs’ are designed to provide incentives to the professional executives so that they can align their interest to those of the shareholders (Robert. 2014).