Business Administration Degree
Dhana K. Jones
Columbia Southern University
March 31, 2015
Unit V Essay
Question 1 Divergent interest insures the efforts and activities of corporate management are aligned in a parallel manner. Therefore, divergent interests seek to move corporate interests in line with the interests of customers. In 1976, Michael Jensen and William Meckling examined conducted a financial study examining the comparable impact of agency cost on an organization. Jensen and Meckling observed that when entrepreneurs own all the stock of a company, they bear all the risks, costs, and benefits of their actions (Graham, Smart, & Megginson, 2007, pg. 448). However, the lack of risk sharing creates moral conflict. A financial conflict of interest occurs when there is a divergence between an individual’s private interests and their professional obligations to stockholders. The interests of stakeholders, vendors, customers, employees, bankers, and society further complicate these implications. Furthermore, damaging these relationships are independent observations that questions professional actions. Conflicting interests cause stockholders and customers to distrust business management. Business managers often produce short-term gains, placating individual gains and stockholder wealth, to the detriment of long-term shareholder wealth. These actions negatively affect entities in the external environment. Short-term gains fail to support societies financial infrastructure. However, companies that develops a culture that consistently strives to align the interests of the customers with that of the company gain long term relationships based on value and trust (MacDonald, 2005, pg. 79).
Therefore, it is imperative that financial conflicts of interest must be managed accordingly. Increasingly, this is of main importance to maintain shareholder and the public’s confidence in ethical business actions. Corporate governance defines the role of management and stockholders. The shareholders role in governance is to appoint directors and auditors, ensuring the governance structure is in place (Tihanyi, Graffin, & George, 2015, pg. 1). Therefore, the interests of vendors, customers, employees, bankers, and the public are protected.
Question 2 Agency theory is the principal-agent model. In this scenario, the principal are investors and the agent is business management. Agency theory affects organizations through management of individual incentives. This is accomplished by producing incentives for team, suppliers, and investors. Pay for performance incurs significant moral decline. The well-publicized corporate crimes of Enron and Adelphia Corporation have led to increased corporate governance and legislative reform. Therefore, the conflict of selling stock to outside investors creates agency cost and affect entrepreneurship which affect growth opportunities (Graham, Smart, & Megginson, 2007, pg. 449). Agency theory affects organizations when the agency suffers loss through the ethical failure of management. Therefore, insider trading negatively affects entrepreneurship ensuring loss of equity. Lack of vital entrepreneurship causes environments not suitable for economic growth. The collapse of the financial markets in 2008 and the resulting global recession indicates that business management malfeasance ruins long-term growth (Tihanyi, Graffin, & George, 2015, pg. 2). Organizational executives have a tremendous information advantage over outside investors. Organizational executives must consume perquisite; therefore, they must reduce their debt by selling stock to outside investors in order to diversify their risk. It is imperative that executives lower their risk and attain investors. These actions ensure long-term growth, sustainability, and maintain societal faith in the organization. Graham, Smart, and Megginson, 2007 state, selling stock allows executives to