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Is it always that the risk attitude (risk appetite) of institutional shareholders is the one that the management focus on despite them having different risk attitude from them? or to what extent is the shareholder’s risk attitude becomes the one to concentrate on if the decision is to be made?
Directors are the agents of the shareholders and should act in the best interests of the shareholders. That should mean that the directors’ decisions mirror the risk preferences of shareholders – after all, shareholders probably bought the shares because they offered a mix of risk and return that the shareholders found attractive.
If directors were to do otherwise I would suggest that something has gone wrong with the corporate governance.
What relationship is there between shareholder attitude and the risk attitude of company manager?
Managers and directors should run the business on behalf of the shareholders. The business should produce returns at a level of risk that the shareholders are comfortable with.
However, the congruence between directors’ attitudes and shareholders’ might not happen. Perhaps it is simply different personality traits: the directors might be natural born gamblers who enjoy risk. It could also be encouraged by how directors’ rewards are structured. If directors can get large bonuses for making food profits over two years, they might not care about the longer term. Furthermore, if the company does not do so well the directors might not lose much. Shareholders will tend to gain or lose depending on the long-term results of the company.
Recent examples were seen in the banking crisis where directors and managers could cash in share options very quickly to create gains for themselves. Newer attitudes suggest that share options should not be exercisable earlier than 5 years or so. At least that should make managers concentrate on share price increases over at least 5 years.
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