Question

o prepare for this Discussion, think about a time in your professional experience when a decision was made that seemed to benefit a specific manager or small group of managers and not the overall corporation. If you do not have professional experience directly related to this topic, research a situation in the news where this theme is demonstrated. Consider the outcomes of such an imbalance between manager and stockholder interests, and research how to avoid such a situation. By Day 3 Post: Describe the situation from either your professional experience or your research. Explain two or more motivational tools that can aid in aligning stockholder and management interests. Explain how your selected tools are effective in resolving potential conflicts among managers and stockholders.

Answer 1

The concept of imbalance between manager and stockholders are very common and widely discussed in theories of the firm, according to the concept firms exist to maximize profits. The objectives of firms and managers may different which create problem in modern days , as the managers or operation heads of firms might have some different concept or goal different from the goal of profit maximization . Simply such conflicts are define as Agency Problems. The agency problem is very common is growing companies , where a large conflict of interest arises between operation heads and shareholders> the shareholders’ would like to maximize the wealth while managers are interested in to maximize the profit or their own wealth. Generally, managers should act as the agent for shareholders but operation heads have the best interest to maximize his own wealth.

Motivational Tools to reduce agency problem:

• Performance based incentives: Motivates managers to work to maximize profit of business
• ESOP ( employee stock option): Creates managers interest as shareholders.
• Close monitoring system: can manage the conflicts before it grow
• Financial Advisory: provide support in condition of financial distress.