Question

APPLE INC-CASE STUDY ON AGENCY THEORY

Apple Inc started operations in early 1970. The company produces specialized items for manufacturing cars. Most of the raw materials used are imported from Brazil because the cost is low and the labor is very cheap. The CEO for Apple Inc, Mr Rodriguez, makes every attempt to keep the cost at the lowest.
From 1970 to 2000 net income has increased at a rate of at least 25% per year. There are around 20,000 shareholders that hold Apple Inc shares. Shareholders are very happy with the company’s performance. Mr Rodriguez always held a meeting with Board of Directors to inform them of any decision involve in the company. As such the BOD is very happy with the company performance and Mr Rodriguez managing style. Every year, the staff received cash bonus of around 2 to 3 times of their salary and Mr Rodriguez received many incentives from the company including cars, houses and cash.
However, at the end of 2001, the cost of raw material increases because of the attack of SARS virus in Brazil. The sales for the year were also reduced. By September 2001, Mr Rodriguez held an emergency meeting with all the staffs. It is estimated that the income for the year will be reduced. By January 2002, after the preparation of the financial statements, net income showed a decreased of around 45% from last year. Mr Rodriguez demanded the treasures and the controller to do something with the figures.
During the BOD meeting in April 2002, the company announced a 15% increase in the income and declared a dividend of around 5% higher than last year. The shareholders reacted positively to the announcement and started buying more shares of the company.
For the next five years, the company continue to decrease in income but providing a good news to the shareholders and giving shareholders higher profit. In 2008, the BOD requested for the company to change the auditor for the company. After the auditing process, the new auditor revealed that the company is in the state of bankruptcy and there are zero balance cash in the bank account. One month after that the company was forced to closed down.
Shareholder were surprised with the announcement and lost all their money. The employees lost their job and many creditors couldn’t claim their money. Shareholders are currently suing Mr Rodriguez and the company for their losses.
Required:-
1. Identify the problem in the case study?
2. How can the situation be prevented?
3. Did the shareholders do the right thing by suing Mr Rodriguez?

Answer 1

1.

The main problem here is that the shareholders and the board of directors were not aware of the actions of the management. This is one of the key problems highlighted in Agency theory (the asymmetry of information between the management and the shareholders). The CEO, Mr. Rodriguez tried to hide the true picture of Apple Inc's financials and was successfully able to do so for a long period of time without getting any attention of the board.

2.

The situation could have been prevented had there been better audit controls in place in the company. The fact that Mr. Rodriguez was able to hide the true picture for over 7 years shows the incapacity of the Board in conducting their job. Mr. Rodriguez was obviously at fault for trying to manipulate company's financials but there should also have been better supervision by the Board as well.

3.

Yes. The actions of Mr. Rodriguez were fraudulent and punishable by law. His actions ultimately affected many different lives from company's employees to the shareholders and he should be sued for his actions.