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Current Issues in Finance: An Overview of the Latest Developments of the financial world

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2 II. ENRON, AN EMBLEMATIC CASE OF DIVERGING INTERESTS BETWEEN COMPANY’S EXECUTIVES AND ITS SHAREHOLDERS In �theory�, shareholders are the only owners of a company, and the task of its directors is merely to ensure that shareholders� interests are maximized. More specifically, � The �duty� of directors is to run the company in a way which maximises the long term return to the shareholders, and thus maximises the company�s profit and cash flow� (Elliot, 2002, p. 789). Corporations� managers, in contrast, tend to prefer a growth in turnover, which would justify an increase in their own salary. Some studies have found that for 10% increase in company turnover managers� compensation tend to increase on average of 20-30% (Lambert and Larcker, 1986). Moreover, turnover growth implies an increase in the overall size of the company, which enhance managers� prestige. When a company grows, the media becomes very interested in it and the impact on the general public is impressive. The CEOs of big, important companies � which may not necessarily mean a profitable company- are far more well regarded than the managers of small -tough profitable- companies, and they can consequently ask for higher salaries. On the contrary, when a company goes through a difficult period and its performance decreases or simply when it shrinks in size, its managers are the first to be blamed. It does not really matter whether there is a downturn in the overall economy or in the firm�s industry, its managers will be always deemed to be the main cause of poor results. For this reason, managers have a high incentive to hide bad performance and accounting losses. Enron is an emblematic case of this phenomenon: its corporate culture was to link tightly executive remuneration to the good performance of the unit they were in charge of. The executives of Enron, thus, fearing salary cuts and downgrading, falsified their accounts in different and imaginative ways whenever they were not satisfied with them. �In 1999 Enron�s managers and its board of directors decided to create financing vehicles and specialized partnerships that seemingly permitted, in some cases, off-balance-sheet financing. However, the management team at Enron then engaged in some hanky-panky, inasmuch as they did not disclose what the firm was really doing, especially with respect to its liabilities� (Ketz, 2002, p. 5).

Anteprima della Tesi di Massimiliano Neri

Anteprima della tesi: Current Issues in Finance: An Overview of the Latest Developments of the financial world, Pagina 2

Tesi di Master

Autore: Massimiliano Neri Contatta »

Composta da 118 pagine.

 

Questa tesi ha raggiunto 1104 click dal 20/03/2004.

 

Consultata integralmente 6 volte.

Disponibile in PDF, la consultazione è esclusivamente in formato digitale.