Scottish political economist Adam Smith didn\'t trust situations where the peopl

Question

Scottish political economist Adam Smith didn't trust situations where the people who provide the money for a business don't actually manage the company. In The Wealth of Nations, he observed that such managers don't watch over the investment with the same anxious vigilance with which the partners in a private [company] frequently watch over their own. How do corporations attempt to protect the interests of stockholders? Do you think that those safeguards are effective? Give examples to support your view.

Explanation / Answer

Corporations attempt to protect the interests of stockholders by paying their management in stock rather than in cash, and often the corporation forces the management to hold on to the stock for a period of time. Thus, if the manager wants to make money, the stock has to do well, and that means the shareholders have to do well. However, after the recent financial collapse, it is becoming clear that those safeguards are not effective. Look at Lehman Brothers, look at AIG, look at Bear Sterns, and Citigroup, and etc. The management of these companies were building up excessively the share price in the short run causing a huge bubble. The hoped that they could dump their shares before the company nose-dived, and many of them did, and made tens of millions of dollars, even though they were hurting shareholders.

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