Owner-manager conflict can result in lost productivity, cause waste, and even bankrupt the company. There are at least five sources of conflict that can arise between owners and managers
- choice of effort. Managers’ extra effort generally increases the value of the firm, but since managers expend the effort, the extra effort reduces their utility.
- PerquisiteToking. Owners have an interest in paying salaries and bonuses sufficient to attract and retain competent managers. However, the owners do not want to overpay the administrators. Instead, managers are likely to want not only higher salaries, but also fringe benefits, such as exclusive club memberships, fancy office furniture, fancy cars, stimulating day care for the kids, and expensive French sweets. Managers can be overpaid while inferior employees are underpaid, creating conflict between all involved that can cause lost productivity and eventually even result in business closure.
- Exposure to differential risk. Managers typically have substantial levels of human capital and personal wealth invested in the business. This large investment can make the managers appear excessively risk-averse from the point of view of the owners, who (at least in a large public corporation) typically invest only a small fraction of their wealth in any one company. Therefore, managers may walk away from projects that they anticipate would be profitable simply because they don’t want to risk the project failing and leading to a reduction in their compensation. Managers will look out for their own interests even if it means a loss for owners or shareholders.
- Differential horizons. Managers’ rights over the corporation are generally limited by their tenure with the company. Managers therefore have limited incentives to worry about cash flows that extend beyond their tenure. Owners, on the other hand, are interested in the value of the entire future stream of cash flows, as it determines the price at which they can sell their rights in the company. Again, the owners want their profits, while the managers just want to work and earn enough to keep their pockets deep.
- About investment. Managers may be reluctant to downsize the company, even if it has exhausted available profitable investment projects; They prefer to build an empire. Additionally, managers are often understandably reluctant to fire colleagues and friends in divisions that are no longer profitable. Managers who fire colleagues bear personal costs (disutility), while shareholders receive most of the benefits. Some managers make friends with their employees and their families, thus causing trouble when they have to lay off or fire them due to business downturns. Managers would rather see owners or shareholders lose profits than let their friends lose their jobs.
An example would be a company that drilled water wells. The owners had built the business to be a reputable and honest business, but after they retired and hired a manager to run the business for them, the manager had different ideas about how to run the business. They were not as honest as the owners and treated the employees dishonestly by cheating them out of their wages. This caused a lot of conflict between the owners and the manager, as the company was losing customers, but the manager was still paying himself large salaries.
Another example is a used car lot in Dade City where the original owners sold cars in an honest and reputable way building the business and when they hired a manager to take over the business, the manager started selling cars that were breaking down weeks after the operation. customers took them off the lot. The manager would not help customers fix cars like the owner did if he sold a car that caused problems for his customers. The manager was making the sales and showing the profit to the owner, therefore he was making more profit for himself, but at the same time he was ruining the reputation of the car lot. There was a conflict with the owner and manager as the owner wanted the business to run one way and the manager ran it another way.
