Managers have always been known to lead and direct an organization or a company by deploying and manipulating of resources i.e. the human, capital, natural, intellectual and intangible. Shareholders on the other hand are the one who holds one or more shares of stock in a joint-stock company. The actual power of the shareholders tends to be very limited though it seems that they are the owners of the companies. They don't have any right to check the book of accounts.
Conflict of interest happens when both parties want to maximize each benefit. The shareholders want to see higher profits as more dividends can be yield from it whilst the managers are more interested in higher revenue because it means more expenses can be made that are beneficial to them. Managers may wish to hold more cash and receive more perks like having a personal jet that would be the expenses of the company and this may reduce the profit. Both managers and shareholders have different attitude towards risk too in which the shareholders may want to invest in many companies so that they are holding less risk if one company might go into liquidation and so the shareholders financial security are not threatened. The manager's financial security on the other hand relies on what happen to companies that employ them which therefore consequent them to not favor the shareholders of investing the companies' fund in risky investment. Conflict between both can also arise when there is takeover bid to the company. This therefore will lead the managers to the loose their job whilst the shareholders will normally gain from this takeover since they will receive above normal gain from the share price.
There are a few mechanisms that might align the interests of both parties. The first mechanism would be the profit related pay. This means that the managers' earnings are paid with accordance to the level of profit. The managers will then try hard to meet the targeted profit so that they can be rewarded more. Besides, the managers should also be rewarded with shares by inviting them to subscribe the shares at lower price when public companies go to public. The managers with shares in the companies will go for projects that would raise the share value of the business and also profitable projects that would give the managers more dividends since they are having investment in the company as well. The third mechanism would be direct intervention by the shareholders in company. The shareholders may actively checking the performance of the company and if they suspect any poor performance that can result to poor profit level or any kind of fraud by the managers, they can quickly take initiative to encourage all other shareholders to remove the managers from the management team or take a strong action against them. The threat of firing is also one of the mechanisms that the shareholders may take in order to discipline the managers. The shareholders may threaten to fire the managers that prioritizing their personal interest rather than increase the value of business. The last mechanism would be the threats of takeover. As mentioned earlier, the managers are not prone to takeovers since they might be loosing their job. Thus, they'll absolutely do anything to go against the idea of taking over. Therefore, the shareholders should take this advantage to threaten them by wanting to accept the takeover bid if they don't meet the standard and target that shareholders expecting. Through these mechanisms, the managers can be disciplined so that this can lead to betterment of both parties, the shareholders and managers.
An example of how this mechanism works, is when the chairman of Shell/Royal Dutch was asked to quit by the angry shareholders after it was revealed that the oil reserved of shell had been estimated by 20% and consequent the share price has skidded on 9 January 2004. Another example would be the plan by Carnival to takeover P&O Princess where the company plans to write to the shareholders of P&O about the takeover since a rejection by the directors of P&O. This could threaten the directors to be more discipline as their job position now might be questionable.
Regrettably though, the shareholders should know that investing in shares shows that you're dealing with risk and having bad managers is one of the risks that you're willing to take.