Question

Why is it common for shareholder priorities to be out of sync with manager priorities?

a. Because nonfamily managers are often perceived as indifferent to family goals
b. Because shareholders who aren't involved in management often do not have the financial literacy to understand the business decisions that affect their returns
c. Because shareholders want more input in business decisions than managers can allow
d. Because managers must put financial choices ahead of family values

Answer 1

Shareholder priorities often differ from manager priorities due to different perspectives on company management, the availability of company information, and variances in financial literacy and desired input levels among shareholders.

Step-by-step explanation:

It is common for shareholder priorities to be out of sync with manager priorities for various reasons. Shareholders invest capital and own a portion of the company, creating an expectation for managers to run the firm in their best interests, as per the concept of shareholder primacy. Conversely, managers often take a broader view, considering the needs of all stakeholders in the business, which is aligned with stakeholder theory. The disconnection between shareholders and managers intensifies as a firm becomes established and no longer relies on personal relationships with investors, as information about the firm's financial performance becomes more widely available, attracting outside investors. Shareholders may lack the financial literacy to fully understand complex business decisions or may desire more input than managers can provide. Managers, on the other hand, focus on a wider set of responsibilities and may have to balance financial choices with ethical considerations and long-term strategy.

Answer 2

Shareholder and manager priorities are often out of sync due to a lack of direct involvement from shareholders in day-to-day management, differing focuses on short-term versus long-term goals, and imperfect information. The debate between shareholder primacy and stakeholder theory also plays a role in this misalignment.

Step-by-step explanation:

It is common for shareholder priorities to be out of sync with manager priorities for multiple reasons. Shareholders may not be closely involved in the day-to-day management of the company, which can lead to a lack of understanding of the business decisions affecting their returns. Furthermore, managers might prioritize the operational aspects and long-term stability of the company, whereas shareholders could be more interested in short-term financial returns. This misalignment is exacerbated by imperfect information, where those running the firm have more knowledge about its profitability than the investors providing capital.

There is an ongoing debate between shareholder primacy and stakeholder theory. The former posits managers should act solely in shareholders' best interests, while the latter argues for balancing the interests of all stakeholders. Additionally, directors, who are often chosen with little direct involvement from the majority of shareholders, typically wield great influence over selecting and evaluating managers. This further widens the gap between shareholder and manager priorities.