Shareholder theory claims corporation managers have a duty to maximize shareholder returns. Stakeholder theory, on the other hand, notes that it's the business managers ethical duty to both corporate shareholders and the community at large that the activities that benefit the company don't harm the community. Below are some scandals discussed.

(a) The Fall of Enron

The collapse of energy giant Enron in 2001 showed how catastrophic the agency problem can be. The company's officers and board of directors, including Chairman Kenneth Lay, CEO Jeffrey Skilling and CFO Andy Fastow, were selling their Enron stock at higher prices due to false accounting reports that made the stock seem more valuable than it truly was. After the scandal was uncovered, thousands of stockholders lost millions of dollars as Enron share values plummeted.

(b) Goldman Sachs and the Real Estate Bubble

Another agency problem occurs when financial analysts invest against the best interests of their clients. Investment giant Goldman Sachs and other stock brokerage houses developed mortgage-backed securities, known as collateralized debt obligations, then sold them "short," betting that the mortgages would undergo foreclosures. When the housing bubble hit in 2008, the values of the CDO's dropped and the short-sellers made millions of dollars. Meanwhile, millions of investors and homeowners lost nearly everything in the collapse.

(c) The Boeing Buyback

Aerospace leader Boeing offers an instructive example of how the agency problem occurs in capital markets. From 1998 to 2001, Boeing had more than 130,000 shareholders. Most of those shareholders were Boeing employees who purchased company stock through their 401(k) retirement plans. At the same time, Boeing was planning on buying back much of its stock, driving down its share price. The actions of the executives in charge of caring for the company damaged the value of its employees' retirement accounts.

(d) Executive Compensation and WorldCom

When an executive uses company assets to underwrite personal loans, the agency problem occurs as the company takes on debts to provide its executives with higher incomes. In 2001, WorldCom CEO Bernard Ebbers took out over $400 million in loans from the company at the favorable interest rate of 2.15 percent. WorldCom did not report the amount on its executive compensation tables in its annual report. Details of the loans did not come out until the company's accounting scandal hit the news late that year.

Required: 

For each scandal, explain the specific angle of the theories being discussed. (Hint: You need to explain how both theories contradict with each other in the above sacndals).

Answer rating: 100% (QA)

a The Fall of Enron The actions of the Enron executives violated the shareholder theory which claims ... View the full answer