How can managers be encouraged to act in shareholders' interests?
The best way to encourage any person to act in the interest of an organization is to link that person's achievement of his or her individual objectives to achievement of organizational objectives. This principle is valid also for encouraging managers to act in shareholders' interest.
Shareholders' interest are best served when the company performs well in terms of profit and growth, which in urn leads to higher dividends and appreciation in value of company shares. Managers can be motivated to improve the performance of the company, by linking their reward and punishment system closely to their contribution to the success of the organization. In doing this two areas need close attention. First, the rewards should include, in addition to monetary and other benefits, also benefits such as work satisfaction and recognition. Second, care should be taken to ensure that contribution of individual managers to the total organization should be assessed properly. Particular care should be taken to ensure that individual success is not achieved at the cost of group effectiveness, and long term interests are not sacrificed to achieve good results in short term.