Separation of Ownership and Control

Separation of Ownership and Control
Shareholders hire managers to manage the firm on their behalf.
Potential Conflicts of Interest
Shareholders vs. other stakeholders
Managers vs. Shareholders
Shareholders vs. Other stakeholders
1. Misleading customers.
2. Violating environmental standards.
3. Needlessly endangering employees.
Managers vs. Shareholders
This involves salary, job security, risk aversion, empire building.
Principal Agent Problem or Agency Problem
The difficulties in motivating one party to act in the best interests of the other parties.
Why managers focus on Shareholders’ welfare.
1. Reputation
2. Compensation
3. Legal Liability
4. Corporate Control Contests
Corporate Control Contests
Two Methods:
1. Proxy Fight
2. Hostile Tender Offer
Proxy Fight
When the stockholders develop opposition to the management.
Hostile Tender Offer
Like a takeover. The purchase of one company by another.
Greenmail
Purchasing enough shares in a firm to threaten a takeover. Forcing the firm to buy the share back at a premium price.
Poison Pill
Defensive tactic used by a board of directions against a takeover. Creating new shares to sell to the non-attacking shareholders.
Pac Man Defense
Turning the tables by trying to buy the attacking firm’s stocks from them.
White Knight Defense
Another firm or individual who helps a firm lost in a takeover. Does not replace the board, etc.
Golden Parachute
An agreement between a company and an employee specifying that the employee will receive certain significant benefits if employment is terminated.