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The agency problem refers to the separation of ownership and control. Shareholders
are the owners, but managers control the firm from day to day. Managers are expected
to act as agents on behalf of the owners who are considered principals. Sometimes,
however, managers act in their own self-interest. Some ways they might do this include
excessive consumption of perks (e.g., flying the corporate jet to a personal vacation
spot), just wasting time (e.g., now working), or making decisions without considering the
effect on shareholder wealth (e.g., adding more employees so that they have a
“kingdom” under their control).
Both target company CEOs and acquiring company CEOs may have goals that are
different than the goals of their shareholders.
Post a paragraph describing the actions that one of these CEOs might take that would
be contrary to the principle of shareholder value maximization; Describe how the action
is against shareholder interest or how it might destroy shareholder value. Be clear in
your discussion of whether you are talking about a target company CEO or an acquiring
Within one week after the initial posting due date (i.e., by May 4th), look over the
discussion posts of your classmates and do the following:
Make a recommendation to one of your classmates as to how to reduce the
likelihood of the situation described by that classmate.
Answer the question: How do you think the situation described by your
classmates could have been avoidable in the first place? If you think the
situation is unavoidable, please explain further.
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