PROBLEMS BETWEEN PRINCIPAL AND AGENT
As discussed above, due to the existence of large companies
with many small shareholders it can be difficult for shareholders to have a
voice. However, it is important to understand that directors have a duty to act
in the shareholder’s best interests. This is known as their fiduciary duty
which means the directors should act in the utmost good faith to the
shareholders and should not place themselves in a position where their own
interests conflict with this duty. In other words, the directors are accountable
to the shareholders.
Problems between principal and agent occur when there is
conflict in the relationship. In many cases the objectives of the two parties
are in conflict. Shareholders may want capital growth or dividend growth.
Directors, who may not be shareholders, may seek to maximise their own wealth
in terms of pay and bonuses. Many bonuses are paid based on profits and
therefore they wish to maximise profits in the short term. This will not necessarily
achieve the shareholders’ objectives.
One way of dealing with this problem is to align the
objectives of shareholders and directors, often by including long-term benefits
in a director’s bonus structure. For this reason, many directors are given
share options that are exercisable at a future date so they will consider the
long-term perspective of the company as well as the short term, thus aligning
the interests of both parties.
Other problem-solving measures include:
- Attending the AGM and voting for or against the proposed resolution;
- Meetings between institutional investors and directors;
- Proposing resolutions to be heard at the AGM;
- Divesting shares.
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