Welcome back to MBA Insights! This week, we’re diving into a vital topic in the corporate world: the relationship between ownership and management.

In most corporations, ownership and management roles are distinctly separate. Shareholders, as owners, elect a Board of Directors to make high-level decisions. The Board, in turn, appoints a CEO to manage the daily operations of the business, supported by various functional leaders, like the CFO, who report to the CEO. However, this separation can lead to a challenge known as the agency problem.

The agency problem arises when managers, entrusted to run the company, do not always align with shareholders' goals of wealth maximization. Sometimes, managers have their own objectives or feel responsible to other stakeholders, such as employees or the community, whose interests may conflict with those of the shareholders. This creates a dynamic of tension between the shareholders (principals) and managers (agents).

A fascinating international survey of managers in five countries – the US, UK, France, Germany, and Japan – sheds light on this tension. While most managers acknowledge shareholders’ ownership, a substantial number believe all stakeholders have some claim. This view influences priorities; in the US and UK, managers largely prioritize dividends, aligning with shareholders, whereas in France, Germany, and Japan, job security is often deemed more important, reflecting a stakeholder-focused approach.

To address the agency problem, corporations often use compensation schemes that align managers’ incentives with shareholders’ goals, such as stock options that reward company share performance. The Board of Directors plays an essential role in supervising and holding managers accountable, while the threat of a hostile takeover can also motivate managers to act in shareholders' best interests. If poor management leads to a decline in share price, the company may become vulnerable to acquisition, providing a powerful incentive for managers to prioritize shareholder value.

However, ownership in a corporation is not limited to shareholders. Creditors who lend money to the company also have a claim on its assets and future cash flows. In cases of bankruptcy, creditors have first rights to the company’s remaining assets, underscoring a broader notion of ownership that includes both shareholders and creditors.

That wraps up our exploration of the balance between ownership and management. Join us next time on MBA Insights as we continue to decode the complexities of the business world!