Goal congruence is the accord between the objectives of agents acting within an organization and the objectives of the organization as a whole. Managers can be encouraged to act in shareholders’ best interests through incentives which reward them for good performance but punish them for poor performance:

Profit related pay. If managers are rewarded according to the level of profit they will strive to achieve high profit levels. Shareholders’ wealth is going to increase, so too is the value of the firm. Sometimes such act might just encourage creative accounting whereby management will distort the reported performance of the company in the service of the managers’ own ends.

Rewarding managers with shares. This might be done when a company goes public and managers are invited to subscribe for shares in the company at an attractive offer price. Managers will have a stake in the business and will venture only into those projects that enhance the share value of the business.

Direct intervention by shareholders. The pattern of shareholding has changed from passive private investors to aggressive intuitional investors. These shareholders have direct influence over the performance of an enterprise. They actively check the performance of the company and are quick to lobby other small shareholders when they suspect poor service or any malpractice by the directors.

Threat of firing. Shareholders can take a direct approach by threatening the managers with dismissal if they put their personal interest above maximization of the firm’s value. Institutional investors enhanced the shareholders powers to dismiss directors as they are able to lobby other shareholders in decision making.

Threats of takeover. Managers would do everything possible to frustrate takeovers as they are aware that they can lose their jobs. To promote goal congruence the shareholders may threaten to accept takeover bid if managers do not meet their set targets.

Source: http//cbdd.wsu.edu