Business Management Exam

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QUESTION 1

Assuming that managers don’t make the same decisions as shareholders/owners, the conflict between shareholders and managers is identical to conflict arising when a principle hires an agent to take actions on the principal behalf, but these decisions are not profit maximizing for principals but are based on opportunistic (self-interest) behavior of agents. In public corporations we face an additional agency problem, in which top executives are not hired by shareholders but by a board of directors who is elected by, and not perfect substitutes of, shareholders/owners.

Well functioning remuneration policy can align the interests of shareholders and managers and mitigate the agency problem by including in the remuneration of managers equity based pay, which will allow a company to share ownership with them and mitigate the conflicts with shareholders. Additionally, a solid remuneration policy, which takes into account performance and results, both in the short and in the long term, can effectively reduce conflicts between shareholders and executives, giving compensations and annual bonuses as a reward for correct behavior, performance thresholds reached and corporation’s goals fully achieved. At the same time in public companies, well-designed corporate governance policy can soften the problem by defining rules, processes, checks and balances. Remuneration decisions, since are made by the board of directors and not the owners/shareholders, can be based on incomplete or wrong information. As a result, many remuneration policies increase agency problems by motivating wrong behaviors. Since the resources are not of the managers, but of the firm, there is a major potential for the participants to behave in ways that intensi...

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...lders, and the whole firm in general.

It is clear then why in Italy there might be a real possibility that minority shareholders’ interests could not be satisfied. The presence of large block holders and family members, retaining huge portions of the company, may influence largely the decisions of the board of directors (including independent directors). As a natural consequence, it has been included in the Italian corporate law the mandatory presence of at least one director appointed by minority shareholders in the board of directors, with the aim to make more neutral, and less centered on block holders’ interests, the decisions taken by the board. In conclusion, with the presence of a director appointed by minority shareholders, the influence of big block holders on the board of directors is lessened and common objectives and goals are brought on more easily.

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