Final answer:
To mitigate conflicts between shareholders and managers, aligning their interests through incentive schemes, oversight mechanisms, transparency, shareholder participation, and shareholder agreements is crucial. A combination of shares exceeding 50% is needed to change company management, and while investors 1 and 2 hold a significant share, they still require additional support. Banks function as financial intermediaries, connecting savers with borrowers.
Step-by-step explanation:
To reduce conflicts between shareholders and managers, also known as agency problems, it's key to align the interests of both parties. Here are some ways this can be achieved:
- Establishing incentive schemes such as performance-based compensation for managers.
- Implementing oversight mechanisms like an effective board of directors or using independent audits.
- Enforcing transparency through rigorous financial reporting and disclosures.
- Allowing shareholders to participate in key decision-making processes, such as the election of board members who represent their interests.
- Establishing shareholder agreements that may include clauses like tag-along and drag-along rights to protect minority and majority shareholder interests respectively.
The Darkroom Windowshade Company example demonstrates the importance of shareholder voting power. To change top management, a simple majority vote of over 50% of the shares is typically required. Investor 1 and 2, holding 20,000 and 18,000 shares respectively, wield significant influence with a combined 38,000 shares, but cannot be certain of always getting their way as they do not hold a majority. They would need support from at least one more investor to pass the 50,001 share threshold for a majority.
Shareholders typically select company managers during annual general meetings where they vote on a slate of board members who are responsible for hiring and overseeing the company's executive management team.
Banks are termed financial intermediaries due to their role in channeling funds from savers to borrowers, thereby bridging the gap between those with excess funds and those in need of funds.