The relationship between shareholders and managers in a company

Managers are appointed by the owners of the firm –the shareholders. Managers may have the personal goals that compete with shareholders wealth maximization.It creates the potential conflict of interest often known as agency theory.A company has stakeholders such as employees, debt holders,consumers, suppliers, government and society. Managers may perceive their role as reconciling conflicting objectives of stakeholders. Managers may pursue their own personal goals at the cost of shareholders, or may play safe and create satisfactory wealth for shareholders than the maximum. Managers may avoid taking high investment and financing risks that may otherwise be needed to maximize shareholders’wealth.

Mechanisms used to motivate the managers to act in shareholders’interests:
Managerial compensation
Direct intervention by shareholders
The threat of firing
The threat of takeover