Arnold Kling

Owners vs. Management

Arnold Kling, Great Questions of Economics
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Another interesting article in the Economist survey concerns corporate governance.

So far, institutional investors in America, who own so many shares that nobody could argue with them, have been shockingly indifferent to bad management...

Why is everybody being so discreet? Many of the biggest fund-management companies are hoping to win investment mandates from corporate pension funds and 401(k) plans, so they do not want a reputation for being troublemakers.

A perennial issue in the corporate sector is how to align the incentives of management with those of shareholders. Until recently, many economists argued that stock options helped to achieve alignment. However, questions now are being raised about whether stock options allow management to ride along with a strong stock market.

Discussion Question. Any individual investor in a corporation benefits from the actions of other investors who seek to improve corporate governance. What does this "free rider" situation suggest about whether management will receive enough supervision from investors?

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