Question

Whether managers act in the best interest of shareholders depends on the manner in which managers are compensated and whether managers be replaced if they do not pursue shareholder goals. T or F

Answer 1

True.

The two factors on which managers act in the best interest of shareholders are :

1) How close management goals are with stockholder's goal. For example if stockholder's goal is maximizing wealth and managers goal is achieving maximum sales then there maybe a conflict. However, if managers are paid/compensated upto their potential, these goals can be aligned. Many firms have large incentive for managers to work on shareholder's goal.

2) Managers can be replaced if they do not pursue shareholder goals. It is correct statement. Shareholders are the owners. If their goals are not achieved by managers, managers can be replaced.

If you have any doubt ask me in the comment section.