Summary
1. Diversion of capital is a common abuse among senior executives. This is especially true among privately held companies. 2. “What’s mine is mine and what’s here is mine, too” is an overriding attitude. 3. Without personal risk on these obligations, one may be at their mercy for completion. They have little mercy and enforcement has its risks.
Analysis
Abuse of working capital, including accounts payable funds, can devastate an otherwise healthy business. While the lender or investor is providing funds for use by the company, the senior executive may consider those funds for personal use. Whether for very short term investments or personal luxury items, the concept is the same.
Recovery of the investment or its satisfactory performance is often left up to the investor. "Hard money” is easy to lend but hard to get back.
The in-control president is in a total control position. They cannot be voted out of office and they cannot be fired. This is the opposite of a publicly traded company.
Additionally, many lenders and investors are fearful of proceeding legally as it may destabilize the company, make the recovery even less likely and potentially embarrass the lender by public exposure of their poor decision.
