Finance Essays – Management Company Stockholders

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Management Company Stockholders

1.1 Introduction

In business finance management, the main objective of a public-listed company is to maximise the market value of the company and the wealth of the stockholders. Traditionally, stockholders yield the power and authority to hire and fire management should the latter fail to produce high returns with calculated risks for the company. Theoretically, the Finance Manager should act in the best interest of the stockholders by taking appropriate actions that will maximise the stock prices, which is a conservation concept that differs in reality.

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This will be discussed in depth in this paper.

1.2 Agency Relationship Problems

In a public-listed company, there is a demarcation between the ownership and management due to differing interests, resulting in the possibility of conflicts of interests between the stockholders and the management, usually termed as an agency problem. The stockholders or Principals will appoint the managers or Agents to run the business. This relationship is also known as the Agency Relationship, which give rise to the following problems:

When a company becomes public listed, the owner is appointed as the Agent by the Stockholders.

The separation of management and ownership of the company results in managers making decisions that are not in-sync with the stockholders’ objective of maximising their wealth. Managers incurring high expenses by exploiting the perquisites such as expensive office decoration, high remuneration, travelling in business class flights or usage of private jets, claiming high transportation and entertainment costs at the company’s expense. This is clearly depicted by the ex-CEO, TT Durai of the National Kidney Foundation (NKF) where it was reported that his annual salary was $600,000 and had lavish personal spending using the monies that were donated to NKF. Managers may adopt an extreme risk aversion attitude and refrain from investing in high risks investments with high returns for fear of losing their job should the investment fail. On the other hand, if they make money, the money will not go into their pockets, instead it will be the stockholders that stand to gain.

The managers may act in their own interests rather than those of the stockholders.

With no turnover or re-appointment of the managers and executives over the years, powers have been monopolised and resulted in vested personal interest of their own. Hence, this will lead to the employment of friends into the management and employing personal audit teams. Using the example of NKF, TT Durai has held the appointment as CEO for a period, resulting in his over-usage of company’s funds for his own personal usage, and collaborated with his friends in fake business deals. Lack of proper governance in the company, which results in manipulation of accounting documents and false reporting of financial issues.

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