The Goals Of Managers And Shareholders Are Not Always Aligned

1292 WordsJul 9, 20156 Pages
The goals of managers and shareholders are not always aligned. Agency theory suggests This misalignment creates the need for costly monitoring through compensation contracts(Jensen And Meckling, 1976; Fama and Jensen, 1983). To align the goals of the two parties, Compensation contracts should be designed to motivate the executive to make decisions that will Not only increase his or her wealth, but will also increase shareholder wealth. Steps taken to Increase shareholder wealth should be reflected in improved firm performance. From the economist’s viewpoint, value of shareholder is created when management generates Revenues over and above the economic costs to generate these revenues. Costs come from four Sources: employee wages and benefits; material, supplies, and economic depreciation of physical Assets ;taxes; and the opportunity cost of using the capital. Under this value-based view, value is only created when revenues exceed all costs including a Capital charge. This value accrues mostly to shareholders because they are the residual owners Of the firm. Shareholders expect management to generate value over and above the costs of resources Consumed including the cost of using capital. If suppliers of capital do not receive a fair return to Compensate them for the risk they are taking, they will withdraw their capital in search of better Returns, since value will be lost. A company that is destroying value will always struggle to Attract further capital to
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