Managers can sometimes have different objectives to owners

Management objectives often vary depending on the character of the manager, the level of ownership they have in/of the firm, their existing reputation, job security etc etc. In large organisations, there is a divorce of ownership as the owners (i.e. shareholders) are usually different to the managers.

A publicly listed organisation can have millions of small shareholders, so it would be impractical for them all to have a say in the day-to-day running of the company. As a result, managers are installed to take care of the running of the firm, who are responsible to the directors, who are themselves accountable to the shareholders who can choose not to re-elect them at the company's annual general meeting.

Managers in a large organisation have the opportunity to follow their own managerial objectives

Whilst shareholders will hope that their management objectives will be to maximise the value of the company, this is not always the case, as without ownership a lot of managers will be free to pursue their own objectives. Often this is to maximise their own salaries, at the expense of the overall value to shareholders. Despite falling share prices and falling profits, managers are reluctant to take pay cuts. In fact, the last few years has seen corporations such as banks actually increase the salaries and bonuses of senior management, despite presiding over falls in profit or even making losses.

Other management objectives that may be desired by managers with no interest in the value of the firm include to maximise their status and feeling of power by having as many employees working for them as possible, which reduce the profits of their division if the salaries and employment costs of these extra employees are greater than the extra income they bring in. Another objective is to delegate as much work as possible to others in order to have more free time, as well as creating a scapegoat to blame if things go wrong rather than themselves.

Management objectives in good times and bad

Of course, there is a limit to what managers can get away with. Managers will often try to placate owners with a certain level of profits, whilst continuing to maximise their own benefits. Particularly in large businesses, the maximum level of profit that could be achieved is impossible to calculate exactly, so as long as the profit level is seen as sufficient by the owners, they are happy to let the management carry on.

However, if the firm is loss-making, managers have a lot less leeway to go after their own objectives. Not only will a firm that is loss-making year after year eventually go bankrupt, but owners are much more likely to vote out existing management as they feel there is little to lose by replacing management which is already doing a bad job in their eyes by eroding the value of their shares with other people.

How can owners align management objectives with their own?

In order to check managers personal ambitions, ego and sometimes just downright greed, owners often introduce ways to align their interests with those of the manager. This interest is basically the increase in the value of the firm, or at the very least not reducing it. This can take the form of minimum performance targets such as a minimum level of profit, return on capital targets, salaries which are linked to profit levels, and share options which become more valuable the higher the company's share price is.

Owners can also insist that managers take part in management training courses which improve their knowledge and skills, to make them more competent in their ability to manage their particular department and the staff within it. This is even more important when this is a person's first managerial role and they require training to learn the skills required to perform the function.

In a small company the owners and managers are often the same

In a company such as a sole trader, small limited company or a small partnership, the managers are usually also the owners, in that between them they own either all or a significantly large part of the company. Their management objectives will almost certainly be those which maximise the value of the company. Whilst a manager in a large company who does not own any of it won't be too fussed about the value of the firm so long as their salary continues to be paid, a manager who is an owner most definitely will.

Of course, many will still have a lot of the desires of those in large companies without ownership, such as the desire to be paid as much as possible, feel important by having a big premises or a large number of staff etc. However, any major decisions will be taken when the impact on the future value of the company has been considered.

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