Английский язык. Практический курс для решения бизнес-задач

Another source of conflict between managers and shareholders is that they have different attitude towards risk. A shareholder can spread his risk by investing his money in a number of companies. A manager’s financial security usually depends on what happens to the one company that employs him. The manager could therefore be more risk averse than the shareholder and not eager to invest in risky projects.

Another situation in which conflicts can arise is when a company is subject to takeover bid. The shareholders of the acquired firm very often receive above normal gains for the share price while managers lose their jobs; if lucky they may be picked by the new shareholders. Therefore, it is not always in the shareholders’ interest that the sought-after companies put up such a defense to drive the bidder away.

Goal Congruence

Goal congruence is the accord between the objectives of agents acting within an organization and the objectives of the organization as a whole. Managers can be encouraged to act in shareholders’ best interests through incentives which reward them for good performance but punish them for poor performance:

Profit related pay. If managers are rewarded according to the level of profit they will strive to achieve high profit levels. Shareholders’ wealth is going to increase, so too is the value of the firm. Sometimes such act might just encourage creative accounting whereby management will distort the reported performance of the company in the service of the managers’ own ends.

Rewarding managers with shares. This might be done when a company goes public and managers are invited to subscribe for shares in the company at an attractive offer price. Managers will have a stake in the business and will venture only into those projects that enhance the share value of the business.

Direct intervention by shareholders. The pattern of shareholding has changed from passive private investors to aggressive intuitional investors. These shareholders have direct influence over the performance of an enterprise. They actively check the performance of the company and are quick to lobby other small shareholders when they suspect poor service or any malpractice by the directors.

Threat of firing. Shareholders can take a direct approach by threatening the managers with dismissal if they put their personal interest above maximization of the firm’s value. Institutional investors enhanced the shareholders powers to dismiss directors as they are able to lobby other shareholders in decision making.

Threats of takeover. Managers would do everything possible to frustrate takeovers as they are aware that they can lose their jobs. To promote goal congruence the shareholders may threaten to accept takeover bid if managers do not meet their set targets.

Source: http//cbdd.wsu.edu

Conflict Between Managers and Shareholders

In the catechism of capitalism, shares represent the part-ownership of an economic enterprise. The value of shares is determined by the replacement value of the assets of the firm, including intangibles such as goodwill. The price of the share is determined by transactions among arm’s length buyers and sellers in an efficient and liquid market. The price reflects expectations regarding the future value of the firm and the stock’s future stream of income – i.e., dividends.

Alas, none of these oft-recited dogmas bears any resemblance to reality. Shares rarely represent ownership. The free float is frequently marginal. Shareholders meet once a year to vent their displeasure and disperse. BoDs are appointed by management – as are auditors. Shareholders are not represented in any decision making process.

The truth is that shares represent the expectation to find future buyers at a higher price and thus incur capital gains. In the stock exchange, this expectation is proportional to liquidity and volatility. Thus, the price of any given stock reflects the consensus as to how easy it would be to offload one’s holdings and at what price.

Another myth has to do with the role of managers. They are supposed to generate higher returns to shareholders by increasing the value of the firm’s assets and, therefore, of the firm. If they fail to do so, goes the moral tale, they are booted out mercilessly. This is one manifestation of the «Principal-Agent Problem». It is defined thus by the Oxford Dictionary of Economics: «The problem of how a person A can motivate person B to act for A’s benefit rather than following (his) self-interest.»

The obvious answer is that A can never motivate B not to follow B’s self-interest – never mind what the incentives are. That economists pretend otherwise just serves to demonstrate how divorced economics is from human psychology and from reality.