“Cadbury shareholders stand to lose out massively”

“Cadbury shareholders stand to lose out massively” is the language a shareholder has used in suing Cadbury to reconsider the Kraft offer. More specifically, according to a Reuters story today:

Merger Posturing and Agency Dilemmas

As I watch takeover announcements, something called the principal-agent problem crosses my mind. Also called “the agency dilemma”, it can be described as follows (paraphrasing from wikipedia):

“the difficulties that arise under when a principal hires an agent, such as the problem that the two may not have the same interests”

More specifically, the owners of a company hire managers to run the company on their behalf. Those managers, often called “officers” are better known as the CEO, President and other corner office, executive suite titles. The owners or shareholders elect a board of directors who are supposed to find, hire and compensate managers so that owners’ interests are aligned with management’s interests. Put more simply, if management makes the company more money, the managers earn more money too- at least that is usually the intent.