Conflicts that happen between owners and managers can be really disruptive for the entire business. They almost always lead to a productivity loss, cause waste and can even lead to bankruptcy in some situations. In order to avoid such a bad situation, Ryan Grigson, a highly experienced manager that knows a lot about conflicts with owners given his sports management experience, talks about what needs to be known. According to him, there are 5 main conflict sources that can appear:
- Effort Choice – Extra manager effort normally increases firm value but this can also reduce available utility.
- Perquisite Taking – Owners want to pay sufficient bonuses and salaries in order to retain and attract the best managers. However, overpaying is not something that is desired. Managers do want high salaries and some perquisites, like a lavish office or luxurious automobiles. This can lead to the situation in which the manager is overpaid and the lower employee ends up underpaid. Conflicts appear between team members and businesses surely lose productivity.
- Different Risk Exposure – The manager has some human capital and personal wealth put into the firm. Due to this it is possible that there is a risk aversion coming in from the owner’s standpoint that just invests a smaller part of personal wealth in a company. Managers might forgo some projects that would be profitable in the event the risk is high and compensation would become lower if failure happens. Managers are interested in personal interests, which can be a loss for shareholders and owners.
- Over Investments – The manager might not want to reduce firm size even if available profitable investments were exhausted. They want to basically build an empire so it is not a wish to fire someone if there is a division that is not profitable. Personal costs appear when firing someone and it is possible for managers to become friends with team members.
- Different Horizons – The claims a manager has on a corporation are connected with firm tenure. There are thus limited incentives in relation to caring about cash flow. The owners want future cash flow streams to be higher and higher. Owners want profits and managers want to have full pockets.
Conflicts between managers and owners tent to lead to some really serious problems. This is why so many startup owners also manage the business they launch, even if they are not necessarily the best possible person for the job. Most of the conflicts appear when a manager is hired after an owner led the company towards profitability.
Fortunately, there are many different ways in which these conflicts can be stopped. The most important thing is always communication. Also, it is important to have all the legal aspects of the business properly set. Lawyers help out so much more than what most people think when thinking about setting up clear responsibilities for managers and business owners during their interaction. If something bad happens, everything is legally covered for the owner and for the manager. This is a gentleman-like way to handle the situation.