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How do you create a convergence between the interests of stockholders and managers?
To create convergence between the interests of stockholders and managers, companies can implement performance-based compensation packages that align managers' rewards with the company's long-term performance and stock price. Regular communication and transparency about company goals and strategies can also help ensure that both parties are aligned. Additionally, involving managers in strategic decision-making fosters a sense of ownership, encouraging them to prioritize stockholder interests. Finally, establishing a strong corporate governance framework can help monitor and guide managerial actions in line with shareholder objectives.
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What are some of the forces that cause managers to act in the interest of shareholder?
There are many forces which will tend to create a convergence between the interests of stockholders and managers, and thus cause managers to be interested in maximizing a corporation's profits or value: a. Competitive pressures could lead to stock price declines for nonperforming company, and again result in take overs, proxy contest, etc. b. In many corporations, management remunerations are tied to the performance and managers frequently are awarded stock options which gain value as the price of shares rises. Thus, managers will have an interest in maximizing stockholder welfare. c. Corporate shares are not only owned by widely dispersed stockholders but by large institutional holders such as: banks, insurance companies, mutual funds, pension funds, etc. These organizations employ analysts who continually study stock performance. Nonperforming companies would be sold from these institutions' portfolios, and lead to decreased prices of these stocks. This could lead to the dismissal of present management.
What is the difference between preferred and common stockholders?
Preferred stockholders have a greater claim on the assets and profits of a company compared to common stockholders. If a company is liquidated, preferred stockholders have to be paid first before the common stockholders.
What is the difference between a bondholder and a stockholder?
Bondholders own a share of the debt of a company. Stockholders own a share of the equity of a company.
What is the difference between preferred stock and common stock?
Preferred stock and common stock are both types of ownership in a company, but they have some key differences. Preferred stockholders have priority over common stockholders when it comes to receiving dividends and assets in the event of liquidation. Preferred stock usually pays a fixed dividend, while common stock dividends can vary. Additionally, preferred stockholders typically do not have voting rights in the company, unlike common stockholders who usually do have voting rights.
The potential conflict of interest between a firms owners and its managers is referred to as what?
agency
