The Greed CycleEssay Preview: The Greed CycleReport this essayArticle Review – “The Greed Cycle” By: John CassidyThis article covers the progression of the modern day corporation. It covers that role that greed has played in the publicly traded companys evolution, as well as the relationship between managers and stockholders with compensation being the root of the issue.
According to the article, the first public company was founded in 1814 by Francis Cabot Lowell. With plans in hand, he could not afford the full construction of himself so he sold stock in his company to 10 people. Seven years later each of the stockholders received a return of more than 100 percent. Lowell had now created a new business model that would evolve into the stock market that we know today. (Cassidy 2)
Initial concerns over the new business model the relationship between the managers and the stockholders. What was going to keep the stockholders interest a forefront concern for managers? What would keep them treating everyday operations as if it was their own investment or even what was preventing them for taking some of the money as their own? Even with such concerns, financial necessity for large ventures such as the development of the railroad made this model the norm and the stock market grew. (Cassidy 2)
In 1929 when the stock market crashed activities such as insider trading, stock price manipulation, and diversion of corporate funds for personal use was uncovered. This led to the first government regulations. The Securities Act of 1933 was enacted to outlaw insider trading and attempts to manipulate the market. Additionally a year later in 1934 the Securities Exchange Commission was created to enforce the regulations. Public confidence slowly returned but the problem was fully resolved and many issues pointed to the compensation of the managers. The pay of CEOs was typically equivalent to the size of the firm. During this period it was more about rapid expansion, in most cases a bigger company equaled larger salary. Money was being mismanaged and spent on lavish offices and trips versus the companys profitability. The issue of managers not keeping the best interest of the stockholders a priority still lingered. (Cassidy 3)
The Securities and Exchange Commission (SEC) and the U.S. Department of Labor (DOL), which did not have an official role, were both active at the time of the law’s enactment in making a determination to regulate insider trading. In 1933 the SEC sent a document titled ”Confidential Regulation of the Securities Market and Its Regulation of Company Information” to the Executive Director of the Board of Governors at the Bureau of Labor Statistics. (See Docket No. C-284212) SEC Commissioner William Howard Taft had no authority on the subject which should have kept a lid on all matters relating to the subject. (See Docket No. C-284443) When the SEC began issuing information it was largely due to the work of other U.S. authorities but the agency was also a key player during the 1930s. In fact, a large number of securities agencies of the 1930s were active in the S&L industry. The SEC established a commission to regulate S&L trades but, at the time of writing, no formal body was in place to handle these matters. The SEC then added the SEC Securities Committee, formed after the merger of the S&L and S&H industries, to regulate securities for this same period. The subcommittee appointed by the SEC was charged with the oversight of all securities for stock sale and for the enforcement of any securities contract, which provided for a three-member committee charged with working for the SEC in the regulation and enforcement of its statutes. During the years of SEC involvement, the Department’s responsibilities under this structure have been much smaller.
The SEC was established to act as a central entity in enforcing the securities laws as well as the federal securities laws and to ensure compliance with all U.S. laws.
In 1934 the SEC was established to ensure that all public securities markets were regulated as provided for by the Securities Act of 1933. SEC Commissioner William Howard Taft testified before the House securities committee in 1931 that he understood the need to implement the standards promulgated by the S&L industry as well as those of other securities industry regulators in implementing regulations and establishing supervision of all U.S. securities markets. (See Docket No. C-28880, SORC) During the next few years the SEC’s role in regulating S&L and S&H trading was taken over somewhat by the SEC as it became more involved with this particular issue. This was to ensure that every one of the S&L and S&H trading firms, without any exceptions, received any such supervision. (See Docket No. C-285619, SORC) Since the Securities Act of 1933 the SEC has undertaken some number of regulatory actions to prevent insider trading and stock market manipulation. SEC Chairman James “Jerry” Thompson, Commissioner Robert “Jerry” Brown, and Mr. “Bob” Smith, Vice Chairman William Henry Jackson, Deputy Chairman Richard L. Wilson, Vice Chairman William J. Smith, and President William F. H. White were all appointed under law to serve as special counsel. This special counsel was appointed by Congress to help the SEC investigate insider trading and stocks trades under the securities act. It was to review the law and set the course of action for implementing the laws under the SEC Act of 1933. The SEC also took several steps together to monitor and to supervise its own supervision and oversight of Securities and Exchange Commission activity. The SEC’s main goal was to ensure that such activities as investment and marketing of securities do not, or would not, adversely affect the market for their products or services.
In 1933 some SEC members became involved and other elements came back as S&H and insider traders became increasingly more focused on the S&H industry. SEC Commissioners William ”
Per the article is was financial economists Michael Jensen and William Meckling who began to argue the it wasnt the employees or managers that were the most important factor in a public firm, but the stockholders. This is where the “principal-agent problem” came into question. In the case of public firms, how could the stockholders ensure and guarantee that the managers hired to run the company act in the best interest of the shareholders? It became a struggle of power and a principal-agent problem. Jensen and Meckley insisted that that is was near impossible to ally the interests. There consensus was that managers would destroy values of organizations. Eventually their logic was heard and the principal agent theory led the decision to reward executives for acting in the best interests of the stockholders. This was in hopes of maximizing the value of the firm. (Cassidy 4)
With the value of the shareholder in the spotlight many private investors were drawn in by greed and the concept of hostile takeovers started to occur. Leveraged buyouts or LBOs became common. In an LBO, an investor would buyout public stockholders and in turn run that company as if it were a private firm. Non profitable divisions