Question

Give some examples of ways in which manager's goals can differ from those of shareholders. That is, please give some examples of potential agency conflicts between shareholders and managers.

Answer 1

Normally, shareholders and managers have goals that increase the value of the organization. in ideal situation managers goals that align with the goals of the shareholders, but this is not always possible.

Shareholders are the owners of the organization they need to know the goals set and those are with fellow shareholders and with the managers of the organization.

Shareholder's goals:

The main goal of the shareholders is increasing the value of the organization, this can be measured in terms of an increase in stock price. market share of profitability. individual shareholders do not set goals they are ultimately set by the management, in case of majority shareholder goals can be set by him.

Managers goals:

Normally managers goals will include increasing sales levels. customer satisfaction and market share. sometimes managers will have personal goals that are set based on ego conflicts between fellow managers, financial goals or career goals.

Potential conflicts between shareholders and managers :

Managers (i.e agents) act on behalf of the shareholders (i.e, principal) to meet goals.

Profitability: Shareholders focus on achieving profitability on cost-cutting measures whereas managers try to achieve profitability by improving productivity.

Risk factor: Manager's goals are often based on calculated risks that the manager is willing to take. This is true of shareholders as well, but agency theory suggests that managers will sometimes set personal goals and make decisions based on what they believe they can actually do to meet the goals of shareholders. While shareholders may set goals that require a great amount of risk, the manager may decide to scale back and avoid some of that risk for the good of herself, her workers and the company as a whole.

Monitoring conflict: Shareholders will not regularly monitor the managers i.e they don't know exactly what the manager is doing or if it is in line with their goals.