If both parties seek to maximize their self interest

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Unformatted text preview: do the perspectives and motives of the manager and absentee owner differ? Because their goals may not coincide, there is a natural conflict of interest between the manager and the absentee owner. If both parties seek to maximize their self-interest, the manager may not always act in the best interest of the owner. For example, the risk exists that a manager may follow the example of Tyco Inc.’s former CEO Dennis Kozlowski, who spent Tyco funds on excessive personal benefits such as $6,000 shower curtains, or Andrew Fastow, the former CFO of Enron, who pleaded guilty to manipulating the reported earnings of Enron in order to inflate the price of the company’s stock so that he could earn larger bonuses and sell his stock holdings at artificially high prices. The owner can attempt to protect him or herself against the possibility of improper use of resources by reducing the manager’s compensation by the amount of company resources that the owner expects the manager to consume. But rather than accept reduced compensation, the manager may agree to some type of monitoring provisions in his or her employment cont...
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