Managers are agents hired by the principle who are the shareholders to perform the duty of managing a company. However, when there is a conflict between the needs of the agency and the principal, an agency problem arises. It is common for managers to make decisions that contradict the best interests of the shareholders in their attempt to benefit themselves or to protect themselves (Billett, Hribar, & Liu, 2015). However, there are motivational tools that can aid in aligning the interest of the shareholders and the management.

One of the tools is managerial compensation. This includes performances bonuses as well as company shares. Company shares can be distributed to managers as performance shares or executive stock options. As performance shares, the managers receive some shares based on the performance of the company. On executive shares option, the managers’ purchases shares at a future price and date. This method is very effective in resolving conflicts between the managers and the shareholders in that it takes care of the managers’ interest. In addition, when the managers become shareholders, they have their interests as shareholders at heart. They cannot try to benefit themselves as managers since they are also shareholders.

Another tool is threat of takeovers. In case the stock price deteriorates because of the managers’ inability to effectively run the company, stock holders can bring in new managers to manage the company (Billett, Hribar, & Liu, 2015). This will be a threat to the existing managers because they can lose their jobs. With the possibility of this kind of a threat, managers will have to follow the interests of the shareholders. Though in some cases the managers may try to raise the companies to avoid threats of takeovers, such a threat will still have an effect on any employee.

References

Billett, M. T., Hribar, P., & Liu, Y. (2015). Shareholder-manager alignment and the cost of debt. Available at SSRN 958991.

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