Corporate Governance: Agency Conflicts

Firms must provide the right incentives if they are to get -Select-shareholderscreditorsmanagersItem 1 to focus on long-run value maximization. Conflicts exist between managers and stockholders and between stockholders (represented by managers) and -Select-employeesdebtholderscustomersItem 2 . Managers' personal goals may compete with shareholder wealth maximization. However, managers can be motivated to act in their stockholders' best interests through (1) reasonable -Select-vacationcompensationperquisiteItem 3 packages, (2) firing managers, and (3) the threat of hostile takeovers. If a firm's stock is undervalued, corporate raiders will see it as a bargain and will attempt to capture the firm in a hostile takeover. -Select-StockholdersBondholdersItem 4 generally receive fixed payments regardless of how the firm does, while -Select-stockholdersbondholdersItem 5 earn higher returns when the firm's earnings are higher. Investments in -Select-riskysafeItem 6 ventures, that have great payoffs to stockholders if successful but threaten bankruptcy if they fail, create conflicts. In addition, the use of additional -Select-equitydebtassetsItem 7 increases stockholder/debtholder conflicts. Consequently, bondholders attempt to protect themselves by including -Select-ethicscovenantscompensationItem 8 in bond agreements that limit firms' use of additional -Select-equitydebtassetsItem 9 and constrain -Select-customers'employees'managers'Item 10 actions.