Lesson 13
Conflict between Managers and Shareholders

Although ordinary shareholders are the owners of the company to whom the board of directors are accountable, the actual powers of shareholders tend to be restricted. They have no right to inspect the books of account, and their forecasts of future prospects are gleaned from the annual report and accounts, stockbrokers, journals and newspapers.

The day-to-day running of a company is the responsibility of the directors and other managers to whom they delegate, not the shareholders. For these reasons, there is potential for conflicts of interest between managers and shareholders.

Shareholders used to take a passive role in the affairs of the company. It was once common to play down their influence. This has changed partly because of a change in the type of shareholder, partly due to takeover activity and partly because of social pressures. Shareholding has changed from private investors to institutional investors, who are able to employ experts to advise on the investment strategy. The company must accordingly be run in a way that guarantees the satisfaction of an increasingly sophisticated shareholder, who will both be competent and keen to assess for himself the truth behind any optimistic statements.

The power that the institutional shareholders have over a company rests on the effect that their investment decisions can have on the share price of a company, on the fact that at times of takeover bid the decision of a few shareholders can have a major influence on whether the bid succeeds or fail, and on the fact that the institutions have large amount of funds that can be made available to a company. The institutions need the companies, as they need good investment opportunities in a healthy economic climate, in order to be able to meet their future pension and assurance obligations.