Question

what are three methods shareholders can use to motivate managers to work in the shareholders best interest?

Answer 1

1. Direct Intervention by Stockholders: The majority of a company's stock is owned by large institutional investors, such as mutual funds and pensions. As such, these large institutional stockholders can exert influence on mangers and, as a result, the firm's operations.

2. Threat of Firing: If stockholders are unhappy with current management, they can encourage the existing board of directors to change the existing management, or stockholders may re-elect a new board of directors that will accomplish the task.

3. Threat of Takeovers: If a stock price deteriorates because of management's inability to run the company effectively, competitors or stockholders may take a controlling interest in the company and bring in their own managers.