A Review of the Greed Cycle by John Cassidy
From the introduction of the first public company by Francis Cabot Lowell in 1814, the principal – agent conflict between stockholders and managers has existed. The Greed Cycle offers an exploration and analysis of the agency problems that exist between stockholders and managers as well as some of the mechanisms that have been used to reduce these problems. The following review will highlight the changing nature of the goal of the corporation, the relationship between agency problems and the goal of shareholder wealth maximization, successful and unsuccessful ways in which agency problems between managers and owners have been addressed, the relationship between agency conflicts and options given to managers, and thoughts regarding the ultimate goal of the corporation.
Into the early 1900s, most managers seemed content to work toward maximizing shareholder wealth in return for large salaries. However, by the 1920s, this accord had changed drastically. Insider trading, stock price manipulation and diversion of corporate funds for personal use was rampant. The goal of the organization had shifted to maximizing the interests of management. Recognizing these abuses and a need for change, Congress enacted the Securities Act of 1933, which, among other restrictions, outlawed insider trading and other attempts to manipulate the market. This act and the establishment of the SEC in 1934 helped to reduce the agency conflict between owners and managers. During the 1960s and 1970s, senior management compensation was more typically tied to the size of the firm: the bigger the firm, the bigger the salary. This ushered in a new goal for the corporation, at least from management’s perspective, to seek rapid expansion of the firm with little concern for risk, profitability, cost, or stock price. During this time, managers spent lavishly on themselves even when their companies were in financial trouble. The 1980s saw another shift with the beginning of the shareholder value
Into the early 1900s, most managers seemed content to work toward maximizing shareholder wealth in return for large salaries. However, by the 1920s, this accord had changed drastically. Insider trading, stock price manipulation and diversion of corporate funds for personal use was rampant. The goal of the organization had shifted to maximizing the interests of management. Recognizing these abuses and a need for change, Congress enacted the Securities Act of 1933, which, among other restrictions, outlawed insider trading and other attempts to manipulate the market. This act and the establishment of the SEC in 1934 helped to reduce the agency conflict between owners and managers. During the 1960s and 1970s, senior management compensation was more typically tied to the size of the firm: the bigger the firm, the bigger the salary. This ushered in a new goal for the corporation, at least from management’s perspective, to seek rapid expansion of the firm with little concern for risk, profitability, cost, or stock price. During this time, managers spent lavishly on themselves even when their companies were in financial trouble. The 1980s saw another shift with the beginning of the shareholder value