CONFLICT OF INTEREST PROBLEM IN THE MANAGEMENT-CONTROLLED FIRMS

Abstract

This study hypothesizes that the conflict of interest problem exists in the
management-controlled firms. The problem does not exist in the owner-controlled firms.
This study supports these hypotheses.
The conflict of interest problem occurs in the management-controlled firms
because managers tend to emphasize their wealth by increasing sales or profit but stock
returns at the expense of shareholders’ wealth. Shareholders are more concerned with
the increase of stock returns, which is related directly to their wealth. On the other
hand, in the owner-controlled firms, since the managers are also the owners of the
firms, the conflict of interest problem does not exist.
The conflict of interest problem still persists even though CEOs have been
compensated well. The problem cannot be solved by how much CEOs are paid, but by
how they are paid. The problem can be reduced by designing compensation scheme that
increases the ownership of the CEOs. This situation had already been recognized by the
U.S. firms, that of the 374 firms in the sample, 80% or 300 firms are the ownercontrolled
firms.

Keywords: Compensation, conflict of interest, agency relationship.