Article Analysis

1880 words - 8 pages

Summary of The Article
Introduction
1. The senior management of companies, whom the Financial Times named the barons of bankruptcy, has made their personal fortunes from salaries, bonuses and sale of stocks even as their companies were on the route to bankruptcy at the start of the second millennium.
2. The veteran observers along with the general public are discombobulated with the astonishing growth of corporate greed in a culture where a person’s worth only depends on the size of their bank account.
3. Although economists argue that greed is indispensible to capitalism as it is the driver of expansion, it has grown uncontrollably in the last years to a point of unmanageability.

Dawn of the Public Company
4. The first public company, founded by Lowell in 1814, established a new business model that promoted various advancements and generated unprecedented economic growth.
5. Many economists, among them Adam Smith, were skeptical of the new model arguing that it is impossible to ensure that managers act in the interest of the company and its stockholders.
6. With technological advances and financial necessity made public companies inexorable but the managers were mostly content with their generous salaries and acted in the interests of the company, proving Smith and others wrong.
7. The avaricious actions of corporate insiders in the late nineteen-twenties led to the stock market crash of 1929. The wrongdoings within the companies caused the government to increase and toughen regulations with the Securities Act and the Securities and Exchange Commission in the United States.
8. Even though business regained the confidence of the public, the problems regarding potential conflict of interest of the management of public companies was never fully resolved.
9. While the stockholders had the ultimate power and could force out managers if they wanted to, the time and cost required for such a drastic action discouraged this to happen. However, when the solution to the problem of managerial self-interest revealed itself, it was more potent than anyone had imagined.

Principal-Agent Problem
10. Two graduates from University of Chicago, Jensen and Meckling, crushed the supposition that the best thing for the stockholders was as big a profit as possible, arguing instead that this didn’t automatically lead to value maximization.
11. The most important people of a company were the owners rather than the management or the employees was the ground for decrease in CEO salaries and the increase of executive stock options.
12. The duo looked at the relationship between owners and managers as a principal-agent problem and searched for the best way to insure that the agent acts in the interests of the principal.
13. They were the first ones to apply this idea to corporations and argued that it was impossible to perfectly align the interests of the owners and the managers.
14. The solution to the problem also came from the principal-agent problem:...

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