Conflict between Manager and Shareholders - Assignment Example

Finance and Accounting 21 November Conflict between Manager and Shareholders Introduction An organization is used by stakeholders to accomplish their interest of making profits. The set goals of each stakeholder motivate him to make more and more contribution; it is a collective responsibility of all stakeholders to make contributions needed for an organization to meet its goals and mission. The efforts of the stakeholders will be of no value if the managers are not trustworthy and are irresponsible. It is a fact that, “shareholders evaluate an organization by the return they receive from their investment” (Organizational Stakeholders 41). This shows how valuable the managers are in ensuring that the needs of the stakeholders are met, and ensuring the success of the organization. The major conflict that can occur between the shareholder and the manager is agency conflict. When the manager is employed to take responsibility of leading the company, what is created between him and the shareholders is what is referred to as an agency relationship (Wijesekera, hubpages.com). The manager performs many duties, but delegates the authority of making decisions to the shareholder although he may also hold a small percentage of capital shares in the company. The shareholders are much separated from the management; they have little time to monitor the operation of the company, and cannot have an opportunity to fully assess whether the manager is acting in the best interest of the shareholders. Agency conflict occurs when there is conflict of interest between the manager and the shareholder. The shareholder may want to invest on a long term project, while the manager wants to make short term projects. He may be tempted to go on with this plan without necessarily informing the shareholder, because he has the capacity to run the company affairs. Wijesekera informs that the manager may be motivated to award himself and the staff better working terms and conditions (hubpages.com). The issue of managers holding back some information from the shareholders is unethical according to the business code of conduct. Company managers are always on a much better informed position on matters regarding the company than the shareholders, and while they have bigger opportunities to make the company progress with lots of profits and making successful ventures, they also have the chance of making the company fail; this is because they have much information than any other person in the firms (Gayle and Miller 2). A manager therefore stands a chance of deciding what to reveal and what not to. The opportunity granted makes the manager decide on the kinds of assets and information to withhold. According to Gayle and Miller, this kind of business is illegal and is regarded as organizational dishonesty (2). 2. Effects of Hiding Information 2.1 Fall in reputation Dishonesty has great consequences to the company which translates to loss by the shareholder. The manager can hide information for as long as he may manage, but the truth always reveals itself eventually. Conflicts are bound to arise in a company after this and the issue could be so serious that the whole society realises it; in the process, the company loses its reputation. According to Cialdini, Petrova and Goldstein, “it takes years to build a good business reputation, but one false move can destroy that reputation overnight” (68). It will be a great loss to the stakeholder when the company loses reputation. 2.2 Creating dishonesty among the junior staff When the manager hides some information from the stakeholders, he is creating a loop hole in the management. If this situation is realised by the junior staff, they may be tempted to also practise the vice of dishonesty, after all, their boss is doing so; it becomes much difficult to take an ethical stand and talk of honesty (“Dishonesty in the Workplace,” cornerstoneresults.com). In a survey conducted in America, it was found out that employees in any company tend to copy the behaviour of the company’s management. So when the management is on the wrong side of ethics, the long run effect is on the business, and hence the stakeholder. 2.3 Agency cost The managers may also be referred to as agents, when there is an issue in the agency relationship. The resulting conflict is referred to as an agency conflict while the resulting cost is referred to as the agency cost. Wijesekera states that “it has agency costs which are costs incurred in order to maintain an effective agency relationship, such as management performance bonus to persuade managers to act in the shareholders’ interest” (hubpages.com). Agency cost is explained through the agency theory, which states the elements of organizational behaviour through an understanding of relationship between the manager and the shareholders. This theory has it that there may be conflicts of self-interest on the part of the manager and that of the shareholders, and this occurs when the manager wants to maximize his benefits at the expense of the shareholder (Wijesekera, hubpages.com). 3. Ways of Minimising Manager-Shareholder Conflicts The effects of agency conflicts are too much and may end up bringing the operation of the company down, therefore mechanisms have to be put in place to ensure that there is transparency between the manager and the shareholders. From the observations, agency conflict comes up as a result of clash of interest, especially when the manager has less or no shares in the company. One of the solutions is allowing an increase in the shareholdings of the insiders and use of outside directors. Fama and Jensen (qtd. in Agrawal and Knoeber 1) support the idea of increasing shareholdings from the outsiders, the argument puts it that there will be increased monitoring of the managerial conduct, and hence eventual increase in the performance of the firm’s own management. Several solutions are still possible including the use of market for corporate control, but as argued by Agrawal and Knoeber, increase of concentration of the shareholdings by the shareholders offers a significant enticement to effectively control and reward performing managers (2). The managers will be more willing to provide all the necessary information to the shareholders, therefore avoiding the agency conflict. The idea of increasing outsider shareholding also provides an opportunity for diligent monitoring of the performance of the managers, therefore giving them very slim chances of hiding some information. 4. Conclusion Although the two ways of minimising conflicts between a manager and shareholders prove to be effective, other possible solutions may be applied as in the case of market for managers mechanism, which tends to give weight to the use of more outside managers, hence greater monitoring of the inside managers. Works Cited Agrawal, A. and Charles R. Knoeber. Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders. The Wharton School-University of Pennsylvania, 1994. PDF file. Cialdini, Robert B., Petia K. Petrova and Noah J. Goldstein. The Hidden Costs of Organizational Dishonesty. MITSloan Management Review, 2004. PDF file. “Dishonesty in the Workplace”. cornerstoneresults.com. 2002. Web. 21 November 2013. Gayle, G. L. and Robert A. Miller. Insider Information and Performance Pay. January 2009. PDF file. Organizational Stakeholders, Management, and Ethics. The Organisation and its Environment, n.d. PDF file. Wijesekera, Lasantha. “Agency Relationship and Conflicts between Business Managers and Shareholders.” hubpages.com. 2013. Web. 21 November 2013. Read More