Question

How can a top management team lower the chances that key managers will pursue their own self-interests at the expense of stockholders? At the expense of the employees? At the expense of other key stakeholders? Without compromising the identity of an individual or group of individuals, share examples you have witnessed where this type of behavior occurred. What action did senior management take to curb the behavior? If no action was taken, in your opinion what could have senior management done?

Answer 1

The Agency Problem caters the conflict of personal interests and interest of stakeholders in business. Agency Problem addresses any kind of conflict of interest between company’s employee or management and the company’s stakeholders.

Usually companies address this agency problem by employing strategic control systems in business. These control systems are governance machinery t hat aims at keeping the agency problem in a company to a minimum level. Employees are given incentives to act in accordance to the business and stakeholder’s interests. Also, another controlling mechanism can be exhibited by linking the employee’s income with the company’s revenue and profits. ESOPs are another great option for exhibiting control mechanism on agency problem.

Many companies use Ponzi schemes as a tool to prioritize their economic interests over the interest of company and its stakeholders. Bernie Madoff is an example of this. Bernie Madoff had created a sham business, which costed its investors approximately $16.5 billion in the year of 2009. The investors were cheated in Ponzi schemes. When caught, Madoff was trialed and charged. He was convicted for 150-year prison sentence.

In this case, the investors needed to conduct thorough background verification before investing in the business; this would have saved their money.