Outline the solutions to shareholders and management conflicts.

Outline the solutions to shareholders and management conflicts.

1. Managerial compensation - The shareholders might choose to peg managerial compensation to performance whereby managers can be awarded bonus stock options, commissions etc that are tied to performance.
2. Shareholders elect the board of directors - At the annual general meeting, shareholders vote for and against the board of directors. If a member of the board of directors has not performed sufficiently he is likely to be voted out. This encourages management to in fact act in the interest of the shareholders
3. Takeovers - Poorly performing and poorly managed firms are often most attractive as acquisitions by private equity firms, investment banks and other corporations. A takeover will likely result in the overhaul of management. Knowing that if they perform poorly they may face a takeover and the subsequent loss of their job, management is encouraged to perform in the interest of shareholders.
4. Threat of firing – the shareholders should make it explicit to the management that if they don’t perform as per their expectations they will be fired.

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Lellah answered the question on November 8, 2021 at 06:30

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