Agency Problems at AIG – Assignment Example

The paper "Agency Problems at AIG" is a wonderful example of a management assignment. In simplest of terms, Agency problems can be defined as the problems that arise due to the differences in the interest of the firm’s owner and managers (Brealey et. al. 2001). In large companies, managers are hired as agents on behalf of the owners. There is a good possibility that the managers may not act in the best interest of the owners. This leads to agency problems. 
Example of Agency Problems at AIG: In spite of a net loss of $99 billion for the fiscal year 2008, AIG declared a bonus of $165 million to its top executives (AIG Annual Report, 2008; Andrews and Bakers, 2009). The managers at the firm say that the bonuses were necessary to retain their “executive talent”. It is, however, important to analyze this reason for large bonuses. 
• The bonus is being taken from the taxpayer’s money through the Government bailout. Is it Ethical?
• Which companies in this current slowdown are in a position for “executive bidding”?
• Will companies actually hire executives who have a history of bad performance at their past organizations? It is clear that the managers are working in the interest of their own rather than that of the shareholders and owners at large.
The current financial crisis has led to an increased motivation for executives to boost up their capital. The executives are supposed to work in the best interest of shareholders, but a variety of factors motivate them to behave unethically, but within the law for their own personal gains. One of the reasons is the focus on short-term goals, and objectives, rather than long-term progress and performance of the company. Factors such as Stock Options, High compensation levels, Bonuses on Stock price, and aggressive tax treatment of corporate perks encourage the unethical increase of capital.