Enron Corporation: The Agency Theory Of Corporate Governance

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CHAPTER ONE INTRODUCTION 1.1 Background to the Study In the aftermath of Johnson Matthey Bankers’, Enron Corporation, WorldCom incorporated failure and a good number of other corporate financial scandals, issues of corporate governance became the focus of public discussion, as poor governance practice was identified as a major contributor to most of the failures. Furthermore, the tragic event of the Russian financial scandal and Asian financial crisis brought global attention to the crucial roles of good corporate governance practice in ensuring soundness of financial services and financial sector stability. Certainly, the fundamental cause…show more content…
They confirms that agents will, nevertheless, act with realistic self interest: as employee directors of a company, they will like to maximize their monetary reward, job stability and other perks, and they will do no more than seek to pacify the shareholders. Nevertheless, they need to be monitored and controlled to ensure that their principal’s best interests are served. This theory is the basis for most of today’s corporate governance activity. Corporate governance focused on separation of ownership and control which results in principal-agent problems arising from the dispersed ownership in the modern corporation (Berle and Means 1932). They viewed corporate governance as a device where a board of director is essentially a monitoring mechanism to maximize the problems brought about by principal agency connection. Mallin (2004), explained in this context that agents are managers, principal are owners and board of directors are monitoring device. Many researchers has examined the board composition due to the importance of the monitoring and governance function of the board (Barnhart, Mar and Rosentein 1994: Pearce and Zahra 1992: Gales and Kesner 1994). They confirm that agency theory considers that the primary responsibility of board of directors is towards the shareholders…show more content…
“The firm” is a system of stake holders operating within the larger system of the lost society that provides the necessary legal and market infrastructure for the firm’s activities. The purpose of the firms is to create wealth or value for its stake holders by converting their stakes into goods and services. World Business Council for Sustainable Development (1999) identified stakeholders as the representative from labour organization, academia, church, indigenous people, government, non-government organization, customers/consumers, communities, employees, legislators and human right groups. Narrow attention on shareholders by the board of directors has now been increased to the stakeholders interest (Smallman 2004). This, perhaps account for reason why royal fathers, labour movement, academia e.t.c in Nigeria are represented and feature prominently in board composition of many
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