The powers of the managerial behaviour are by no means unconstrained. On one hand they are constrained by the shareholder, involuntary takeover, and by the debt market through threat of capital starvation while on the other hand they are constrained by the ever present force of competition in product markets and its managerial labour market. While there are significant differences among countries, managerial constraints are ineffective and managerial objectives predominate.
The first constraint in managerial behaviour is coming from the share holders. The reason is that, dispersed ownership in large firms increases the principal-agent problem due to asymmetric information and managers are subjected to bounded rationality.
Because the contracts between managers and shareholders are unavoidably incomplete as future contingencies are hard to describe, shareholders must monitor managers. However, the cost of monitoring tends to be really expensive and when the equity is widely dispersed, shareholders do not have appropriate incentives to monitor managers since it is often that managers have better information and are more knowledgeable. The common solution is by appointing the Board of Director with the fiduciary obligation to look out for the best of their interest and monitor managers. Nevertheless, this is only partially successful since in most cases the Board of Directors is also in the management.
One way to align manager is by introducing Management Remuneration Schemes. This is not only to motivate managers to work harder or guarantee them a competitive salary, but a way of getting them to work in the interests of the owners. The remuneration scheme is the signal of owner expectations from management and can be divided to Cash-Based which includes performance-related and profit-related, and Share Ownership or Share-Value-Based. The argument for cash-based incentives is that it provides motivation for effort and cooperation to maximize results for the firm, and that it is good for morale if managers get more when profits are good. However, the disadvantage is that, it transfers part of the risks of a firm to the managers, who if they are risk-averse might prefer incomes which were smaller on average, but safer. Among the share-based systems, the most common are stock options. Stock options are long-term incentives, normally supplementing short-term schemes like performance- related pay. Nevertheless, when managers are subjected to stock options compensation, they are most likely to focus more on their stock returns.
The effect in shareholders control to manager is different among countries. For cooperative system in European countries, constraints on managers are not only coming from the owners, but also from other stakeholders such as employees, customers, suppliers and the local community. Therefore, managerial behaviour is highly constraint in this region. Unlike in the Europe, the concept of the stakeholder firm that emphasize cooperative labour relations was largely ignored by US and UK whereby shareholders are the only residual income claimants and risk bearers in a firm (Fitzroy 1998). In the UK and US, maximization of shareholder value is generally regarded as the only legitimate goal of the firm through stock-options or bonus payment which leads to high basic salary and other payments. Hence manager of a larger firm not would prefer to be risk-averse rather that...