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Macroeconomics I – The goals and decisions of organisations

Management objectives and

governance

4.1 The principal - agent problem

 In some, usually small, companies the owners also manage the business.

 However, in quoted companies shareholders delegate control to professional
managers – the board of directors – to run the company on their behalf.

 This separation of ownership and control leads to a potential conflict of interests
between directors and shareholders.

 This conflict is an example of the principal - agent problem. The principals (the
shareholders) have to find ways of ensuring that their agents (the managers)
act in their interests.

4.2 Possible areas of conflict

 ‘Fat cat’ salaries and benefits

 Mergers and acquisitions

 Poor control of the business

 Short-termism

Attempts to resolve this conflict can take a number of forms:

 Corporate governance (see below)

 A review of the remuneration and bonus schemes given to directors

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