Rewrapping the Package: Managerial Incentives and Corporate Governance

The modern corporation is an efficient means of organizing large-scale production because it encourages efficient contracting. The corporate form of organization also facilitates combining the capital from many dispersed investors with the skills of a professional management team. Therefore, it is not necessary for the investors who provide the capital to manage or even understand the business. However, when one party delegates the authority to make decisions on its behalf to another party, there may be a misalignment of incentives and resulting agency costs. This article illustrates four general conflicts of interest that occur between stockholders and managers.