Briefly discuss the conflicts that may arise between shareholders and management when the managers may be enticed to pursue their own goals rather then that...

Briefly discuss the conflicts that may arise between shareholders and management when the managers may be enticed to pursue their own goals rather then that of the shareholders.

1. Incentive problem – managers may be earning fixed salaries and may therefore not have the incentive to work hard and maximize shareholders wealth.
2. Consumption of perquisites – perquisites refer to high salaries and generous fringe benefits which the management may award themselves. This reduces the dividend paid to the shareholders and it’s therefore against the interest of the shareholders.
3. Different risk profiles – shareholders will usually prefer high risk investments since they have many other investments while the management will prefer low risk investments since they have a personal fear of losing their jobs if the organization collapses.
4. Different evaluation horizons – management may undertake investments which are profitable in the short run while investors prefer investments which are long term. Conflict will therefore arise when management pursue short term profitability while the shareholders prefer long term profitability.
5. Management buyout – the management may attempt to acquire the business from the principals. This is inconsistent with the agency relationship expectations and the contract between the shareholders and the managers.
6. Creative accounting – this involves the use of accounting policies to report high profits or hide some crucial information from the shareholders. Through creative accounting, managers mislead the shareholders.

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Lellah answered the question on November 8, 2021 at 06:27

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