Lesson 2 of 7 · All lessons in this module
- Principal-agent relationships and agency costsVideo lesson
- Managers versus shareholders: five ways interests diverge
- Controlling versus minority shareholders, and shareholders versus creditors
- Reporting, shareholder meetings, activism and takeovers
- Creditor protections and board committees
- Employees, customers, suppliers and governments
- Risks of weak governance and benefits of strong governance
Lesson 2 of 7 · 13 min
Managers versus shareholders: five ways interests diverge
Pay is the main tool for aligning managers with shareholders, but managers can still under-work, take too much or too little risk, build empires, entrench themselves or help themselves to company resources.
In short
- Compensation is the principal tool for aligning management and shareholder interests.
- Insufficient effort: avoiding hard decisions, too little monitoring, or too little time because of outside roles.
- Inappropriate risk appetite: heavy options pay can push excessive risk-taking; little or no equity pay can make managers too risk-averse.
- Empire building: pay and status grow with company size, encouraging growth for its own sake (e.g. value-destroying acquisitions).
- Entrenchment: protecting one's job by copying peers, avoiding risk, or pursuing complex deals only incumbents can run; directors stay silent.
- Self-dealing: excessive perks or misappropriating assets; the smaller a manager's stake, the less of the cost they bear.
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