Question

There are several forces which will tend to create a convergence between the interests of stockholders and managers, and thus cause managers to be interested in maximizing a corporation's profits or value, what are they? Is measuring profit or value the best approach to take? Be sure to support your answer with a reference(s).

Answer 1

The managers are the leaders of the company who will guide others how to work in order to make profit for the company. Stockholders on te other hand buys a particular number of stocks of the company.

To create a convergence between the managers and the stockholders, a policy of buying shares by the managers could be available. In this way the managers will not only feel like their duty to increase the profit of the company but also they will get an extra incentive in doing so as their own shares are at stake at market. In order to raise the price if the shares in the market the managers will in turn try to be more profit centric . This thereby will help the shareholders also who have invested in the company'' shares.

There might be a policy of dividing a patticulpa part of the profit among the managers. This will give the managers a greater incentive to work and to earn profit as they will also be a part of that profit.

Managers could be given a particular amount of bonus for meeting their target which thereby will give them a better incentive to work. Thus target of bonus could be dictated by the stockholders. On the company earning greater profit, the both the managers and the stockholders will be benefitted .The managers will get their respective incentives and the stockholders will have an increased pricevofbthe their stocks in the market.

The convergence of the managers and the stockholders will be good for the company as this will lead to an increased profit for not only the company but also for both the stockholders and the managers.