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.
Requirement:-

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?