The Worldcom Case Study: Maxwell Communications Case

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Introduction

Agency theory means that the agent who are the directors of the company is under contract to act on best interest of the principals who are the shareholders. Agency problem arises due to the fact that there is a breach of trust where the directors are acting on their own self interest instead of shareholders’. In regards to the problems, there is also an information of asymmetry, which would described as the agents would have more information than the principals.

Executive Summary

Agency Problems

Reportedly there are numerous corporate scandals throughout the years, for example Robert Maxwell (1991), Barings (1995), Enron (2001), Lehman Brothers (2006). As the matter of fact, various Governance Code of Ethics were implemented
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CEO of 2001 Bernard Ebbers took out $400 million as loan at favourable interest rate of 2.15%. It was not reported in the annual report of Worldcom as the board members were aware of the issue because they were given high compensation to keep their mouth shut. The aggressive culture of demanding high returns are due to weak internal controls and lack of competitiveness and also causing unethical behaviours.

In Maxwell Communications case, the shareholders were intimidated by Robert Maxwell’s dominant personality and gave him too much power by means of giving the position of CEO and Chairman, no one is allowed to have too much power as he would abuse his power. Cadbury Report 1992 emphasised that there should be separation of ownerships.

Along the lines of agency problems, the one go the executive director of MG Rover received $40 million with the company was suffering mismanagement, also the ED were give excessive salaries and bonuses regardless their performance were good or bad. Greenbury Report 1995 is formed to look into directors remunerations as the public and shareholders were condemned with the idea. Appointment of independent directors would provide better supervision, also allowing to judgement the performance efficiency wishing the
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Monitoring cost are costs of measuring, observing and controlling the behaviour of management by means of separation of ownership and management. The costs would include preparation of audited financial statements and reports to ensure true and fair view allowing auditor to detect and deter fraudulent or unethical activities. The need of non executive directors in order to provide balance and scrutiny to the board and also to reduce conflict between ED and shareholders. The purpose is to prevent them from withholding information and

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