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Potential sources of conflicts between shareholders and the management
This arises out of the separation between the management and control of a business. The shareholders own the business (Principals) and the management are the agents employed to run the daily activities of the business. Sources of conflicts include:
(i) Incentive problems – where managers are paid a fixed salary, they lack the incentive to work harder to maximize the shareholders wealth. This is because they paid the same salary irrespective of the profits they generate.
(ii) Consumption of perks and perquisites – perquisites are high salaries and other fringe benefits that the management may ward themselves. This eats on the profits available to the shareholders hence the conflict.
(iii) Difference in risk profiles – Shareholders prefer high-risk projects in order to earn high returns. Managers, on the other hand may prefer low risk projects for fear of being fired if they undertake high risk projects and fail. This leads to low returns to the shareholders, hence the conflict.
(iv) Investment evaluation horizon – shareholders prefer long term projects in line with the going concern concept while managers may invest in short term projects.
francis1897 answered the question on November 1, 2022 at 12:21
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213,000
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