Discuss the following questions. Shareholders elect a board of directors to elect (i.e., hire), direct, and monitor the top executives of the firm, with the intent of having the firm managed in a way that is beneficial to the shareholders. Why is it then that we sometimes see unfortunate examples of executives bilking investors (e.g., Enron, Worldcom, Tyco, and Adelphia)? Do changes need to be made in the way that shareholders control the firm's top executives? Shareholders have the ability to spread their wealth in other places and diversify their portfolios. Also, many shareholders do not have the knowledge of specific firm's financing issues, industry problems, etc. Under this system, a shareholder believes that the executives are representing their best interests and doing everything they can to generate wealth and grow the firm. However, since the shareholders are not involved in every minor decision taken within the company, it gives the executives the edge to get away with ignoring shareholders' interests or even fraud in extreme cases. Again this may take a number of years for the shareholders to identify. Also in this system, it is understood that there can be four shareholders or 4,000. Sometimes it takes thousands and thousands of shareholders to finance a large firm. Keeping all of these people in the loop would be daunting and impossible. Having a few individual executives responsible for making the business decisions is much more efficient for the firm. This is the best system in place to run a firm efficiently. It is ultimately the responsibility of the executives to maximize profits and to keep the shareholders happy. There are many laws in place that are supposed to keep the bad apples in check such as the Sarbanes-Oxley act of 2002 and GAAP. Changes like these acts are necessary to protect the current system. However, given the structure of firms today, the current system is the best one in place. Small changes may be...
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