How the interests of the shareholders differ from those of the board of directors and the company.
The differences in the interest of the shareholders and directors of the company arise from the agency problem. According to Kaplan Schweser (2019) in the context of a corporation, shareholders are the principals (owners), and firm management and board members (directors) are their agents. Managers and directors may choose a lower level of a business risk than shareholders would. This conflict can arise because the risk of company managers and directors is more dependent on firm performance compared to the risk of shareholders, who hold diversified portfolios of stocks and are not dependent on the firm for employment. Conflicts may also arise when directors who are also managers favor management interests at the expense of shareholders or when directors favor one group of shareholders at the expense of another (Kaplan Schweser: 2019).
There is also an information asymmetry between shareholders and managers because managers have more and better information about the functioning of the firm and its strategic direction than shareholders do. This decreases the ability of shareholders or non-executive directors to monitor and evaluate whether managers are acting in the best interests of shareholders (Kaplan Schweser: 2019).
