Conflict Between a Corporation\'s Management

¶ … conflict between a corporation's management and shareholders affect the corporation?

Theoretically, shareholders are the legitimate 'owners' of a corporation, and the managers are the individuals whom they hire to run 'their' company. However, in reality, managers seldom function as the 'hired help.' The shareholders may be a diverse and fragmented group, unable to convey a clear message to management about how they would like to run the organization. Moreover, managers who do not have a personal financial interest in the organization may actually have hidden incentives not to serve the needs of shareholders.

Managers may have a desire to maximize personal glory and boost their own resumes. They may allow the firms they run to expand too quickly and use revenue to reinvest in new enterprises, rather than return the revenue to shareholders. They may be more risk-adverse or risk-taking than shareholders might desire, in the interest of either preserving the company, or engaging in flashy, headline-grabbing speculation. And of course, the use of company funds for large bonuses and other 'perks' divert funds away from shareholders' profits (Vishny, 1989, p.2).

One commonly-cited solution to this potential conflict of interest is to demand that managers have a stake in the profitability of the company. Top-level managers can be required to own a certain amount of equity in the company, theoretically eliminating their conflict of interest with shareholders. However, some have criticized this strategy: shareholders can focus so much on short-term profits; they may lose sight of the need for long-term investment in research and development, and have little concern for the needs of company employees (Pareek 2003). A disinterested manager is supposed provide more objective advice and theoretically has an interest in not loosing his job: the elimination of 'golden parachutes' that reward managers regardless of company performance might be a better solution. Always, a balance must be struck between the needs of self-interest in objectivity and hiring a manager with a track record that suits the company's needs, rather than attempting to micro-manage his or her personal investments may be the best strategy.