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7/31/07

Conflict of Interest Between Managers and Shareholders

Corporate managers and shareholders can sometimes find themselves in a conflict of interest. The goal of being a good manager is being able to spot these potential conflicts and to remedy the situation before a serious problem arises.

The biggest conflict between managers and shareholders is going to be money. Here is the most common scenario. A corporation is profitable. In fact, the corporation is more profitable than expected. Therefore, the corporation has a cash surplus, if you will. Managers would want this money as a financial bonus and the shareholders would want this money as a stock dividend. What to do? What to do?

Mangers will argue that without their leadership and managerial ability, the corporation would not have been as profitable. The shareholders will argue that without their money, the corporation would not have been able to invest in its growth, and therefore, would not have reached that level of prosperity. Who should get the money?

Another situation arises when the managers are also shareholders. This may lead a particular manager to push the opposite way of his/her position. For example, if a shareholder manager would get more money from a stock dividend than from a bonus, this shareholder manager might vote in favor of a stock dividend, not because he/she believes that stockholders should be rewarded for their investment, but because it will mean more money for that particular manager. What if only that one manger is a stock holder?

Before you try to wrap your head around all the possible situations, let me inform you that there is no right answer to this scenario. If you do not give a dividend to the shareholders, you may find your stock undervalued by disgruntled stockholders and your stock as a less attractive purchase. If you do not give your managers a bonus, managers may leave your company or not work as hard as they normally do. Usually, managers are under contract, therefore their job performance is linked to their continued employment, however, if a manager is not being rewarded for his/her hard work, what is the incentive in staying?

Looking at it from a strictly economic point of view, it might be advantageous to give a little money to both parties. However, in the end, the profitable of your company rests in the hands of managers. Be sure to treat both parties well and you should avoid these potential problems.


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