Discussion Post #1

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Colorado State University, Global Campus *

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580

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Economics

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Feb 20, 2024

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docx

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Uploaded by ProfWaterPelican44

Some managers focus on the bottom line or the firm's net income. This week, please discuss some of the potential problems associated with such a myopic view. Give a historical example of a business or manager that suffered from excessively focusing on profits for either the company or themselves. A common issue with agency problems occurs within executive compensation. For example, in 2001 CEO Benard Ebbers took out $400 million in loans at an interest rate of 2.15 percent (Bebchuk, 2003). The company, WorldCom, failed to include this information in its annual report. The company argued that this was “market rate” however this was below the 5 percent rate that the company would have given to everyone else. None of this would have been revealed, but WorldCom became involved in an accounting scandal a year later (Bebchuk, 2003). Instead of serving the best interest of the firm, Ebbers utilized his position to take advantage of the company, something that would not be available to the average consumer. As we learned in the readings for this discussion, there tends to be a disconnect between the decisions a manager makes and company goals. Often, an executive might favor a decision that would benefit him/her directly vs. maintaining the value to shareholders. However, executives are hired by shareholders to represent the best interest of the company. In order to reduce such issues from arising, many executives are now paid with stock options so that the personal interests are aligned with that of the company. There can still be agency issues that arise from this (such as determining whether or not to acquire a company) but companies are innovating to prevent situations like this from arising. In general, like Michael mentioned - focusing only on the bottom line can cause other important issues (such as culture, employee turnover, balance sheet/income statement calculations) to be swept under the rug. As we’ve learned through other failures, companies will try to hide issues with creative accounting and should approach their business holistically, not simply focusing on the bottom line. Reference: Bebchuk, L. A., & Fried, J. M. (2003). Executive Compensation as an Agency Problem. The Journal of Economic Perspectives , 17 (3), 71–92.

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