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...