Corporate Agency Problem: The Enron Scandal
Corporate Agency Problem
Every company or organization in the world whether it was large or small, successful or unsuccessful faces external or internal problems, these kinds of problems can lead to less productivity and efficiency within the firm and create a big scandal, one of the most common problem is ‘Agency problem’.
Agency problem or referred, as conflict of agency problems is a conflict between the shareholder and the management or between the debt holder and management. This kind of conflict is very common and also occurs in well-known corporations including the most common incident, which is the ‘Enron scandal’. When a principle of a company assigns someone as his/her agent, the agent is expected to act as his/her best in order
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Agency cost is a cost that arises from agency problems that are borne by shareholders and represent a loss of shareholder’s wealth.
The problem occurs where the two parties have other interest or sometimes the agent has more information (asymmetric information), beside the principle cannot monitor his agent all the time and ensure that he is acting at the best interest. Another case is when there are activities that are going to benefit the principle but are quite costly towards the agent. Therefore, the agent refuses to conduct this activity. Likewise, where the costs of what an agent is doing can be costly for the principle, these cases are indicated as Moral Hazard and Conflict of Interest.
Moreover, there is another kind of agency problem; this problem involves the presence of big stockholders and small stockholders. When shares are given out to the stockholders, a behavioral act between the big stockholder and the small stockholder takes place meaning that the actions of the small stockholders are impacted by the big stockholders decisions, therefore the big stockholder invades on the interest by dividend
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