Shareholders versus Managers

A Limited Liability company is possessed by the shareholders though in most of the cases is managed by a board of directors selected by the shareholders. This is since:

(i) There are many shareholders who cannot efficiently administer the firm all at the same time.

(ii) Shareholders might lack the skills needed to manage the firm.

(iii) Shareholders might lack the requisite time.

Conflict of interest generally occurs among managers and shareholders in the following manners:

(a) Managers might not work hard to maximize shareholders wealth when they perceive that they will not share in the profit of their labour.

(b) Managers might award themselves massive salaries and other profits more than what a shareholder would think reasonably.

(c) Managers might maximize free time time at the expenditure of working hard.

(d) Manager might undertake projects with various risks than what shareholders would think reasonable.

(e) Manager might undertake projects which enhance their image at the expenditure of profitability.

(f) Where management buyout is endangered. ‘Management buyout’ takes place where management of companies buy the shares not owned by them and hence make the company a private one.