Final answer:
A firm might employ shareholder primacy or stakeholder theory to align management priorities with shareholders' interests. Enhanced shareholder engagement in board elections and regulatory changes could better align interests, alongside increasing transparency for outside investors.
Step-by-step explanation:
Aligning Management Priorities with Shareholders' Interests
To align management's priorities with shareholders' interests, a firm might rely on two leading perspectives: shareholder primacy and stakeholder theory. Shareholder primacy emphasizes that managers have a deontological duty to act in the best interests of shareholders, optimizing profits and shareholder value. Stakeholder theory, however, suggests that managers balance the interests of all parties involved with the firm, including employees, customers, and the broader community, not just shareholders.
Executives often have a significant role in electing the board of directors, which can lead to a potential misalignment of interests, as management may select board members who are more likely to approve their strategies rather than strictly represent shareholders. Few shareholders involve themselves in board elections due to a lack of knowledge or personal incentive, allowing management to maintain their influence over board composition. To mitigate this, some suggest greater shareholder engagement in nominating board members, or even regulatory changes to ensure that board member selection is more independent of executive influence.
Furthermore, as a company grows and its operation's information becomes more transparent, outside investors such as bondholders and shareholders may depend less on direct knowledge of management and its plans, relying instead on widely available financial and operational data. This transparency can lead to increased trust from investors, ensuring that managerial actions and company strategies are aligned with their interests due to increased scrutiny from a more diverse pool of investors.