Question

As most of you know, the basic legal structure of an organization consists of officers, directors and shareholders. Officers are those employees that are hired by the board of directors to run and manage the organization. The board of directors is elected by the shareholders of the organization, and the function of the board is to manage the officers and the overall strategic direction of the organization. The shareholders are the owners of the organization, and typically collect dividends in the event that the organization realizes a profit. What are some of the inherent conflicts between the officers, the directors and the shareholders? How are these conflicts best resolved?    

Answer 1

The first and biggest conflict is the agency conflict where officers and directors are one side as agents and shareholders are the another side as principal. It happens when agents take decisions that may not serve best for the organization. The second conflict is the of the objectives, when shareholders demand more profitability, but directors and officers follow the stakeholders approach. There is another conflict between officers and directors as they do not communicate well and officers find directors to responsible for all the problems. It happens when there is a lack of communication between directors and officers.

These conflicts are best resolved, when the interests & benefits of the officers and directors are linked with the best interest and growth of the organization. It means that when an organization grows, then shareholders benefit, and at the same time, profit level of the officers and directors also grow. So, all parties are in a win-win situation. For this,  Growth linked bonuses, employee stock option plans and incentives should be given to the officers and directors so that all the decisions should help the organization grow. It will effectively manage the biggest conflict. Further, there should be a proper dialogue, communication and feedback system so that directors should know regarding the impact of their policies and make necessary changes. It will also help officers get motivated at work and turnover ratio will also decreases.