Corporate managers work for the owners of the corporation. Consequentl

Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the best interests of the owners, rather than in their self-interests.

What strategies are available to shareholders to help ensure that managers are motivated to make decisions in the interest of shareholders?

ANSWER

Generally speaking shareholders may use the “carrot” of performance-based compensation such as bonuses or stock options whereby good performance by the firm results in higher compensation for managers. Stockholders also may use the “stick” of board of director oversight to monitor managers to make sure they are optimally fulfilling their responsibilities. There is also the market for corporate control where well-capitalized stockholders may take control of what they view as under-valued firms. Such outside forces should “encourage” managers to maximize firm value.