Chapter 09 – Agency Conflicts and Corporate Governance
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CHAPTER 9
Agency Conflicts and Corporate Governance
1. Aversion to sure loss, supported by excessive optimism and overconfidence, drove the
behavior of both Waksal and Stewart. Once both had advance knowledge of the decision by
the FDA regarding Erbitux, the reasonable expectation of a price drop in ImClone stock
2. Issuing new equity is like selling lottery tickets. Biotech stocks offer the small probability
3. HealthSouth’s interest to engage in fraud would naturally be in conflict with the interests
of its auditors. Therefore, the “pristine audit program” can be construed as a device to move
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4. Apple was a special case, and not typical, as the firm’s financial success translated into
Cook’s executive stock options becoming very valuable.
As backdrop, the chapter mentions the following about developments since 2012:
“Compensation consultants have suggested that particular measures did eventually induce
corporate boards to replace stock option compensation with restricted stock. These measures
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Chapter 09 – Agency Conflicts and Corporate Governance
Minicase
Case Analysis Questions
1. All of the elements mentioned in the compensation committee review are reasonable and
plausible. However, these elements did not prevent Hertz executives from engaging in
2. The classic fraud triangle features pressure, opportunity, and rationalization. Pressure
stems from aspiration-based risk seeking and aversion to a sure loss. Opportunity stems from
having weak internal controls. The minicase states the following: “Frissora’s ‘management
style and temperament created a pressurized operating environment at the company, where
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reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
3. The minicase mentions that COSO chair at the time pointed out that the list of problems at
Hertz represents four of the five components of effective internal control emphasized by the
4. Both firms featured performance-based compensation, especially for the CEOs. Both firms
engaged in accounting fraud in an attempt to induce investors to have an upwardly biased
perception of both firms’ financials. Both firms featured a pressurized operating