Which Company Is The Parent Company Of Value City Furniture Owner Manager Conflict Within the Firm

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Owner Manager Conflict Within the Firm

Conflict between owner and manager can result in loss of productivity, cause waste and can even lead to the demise of the business. There are at least five sources of conflict that can arise between owners and managers

  • Choice of effort. Additional effort by managers generally increases the value of the firm, but as managers exert effort, additional effort reduces their utility.
  • Perquisite Taking. It is in the interests of owners to pay sufficient salaries and bonuses to attract and retain competent managers. However, owners do not want to overpay managers. In contrast, managers are likely to want not only higher salaries but also perks such as exclusive club memberships, lavish office furniture, luxury cars, stimulating daycare and expensive French confectionery. Managers may be overpaid while lower-level employees are underpaid, leading to conflict among all involved, which can cause a loss of productivity and ultimately result in the business closing down.
  • Differential risk exposure. Managers typically have significant levels of human capital and personal wealth invested in the firm. This large investment can make managers appear overly risk averse from the perspective of owners who (at least in a large public corporation) typically invest only a small fraction of their assets in a single firm. Thus, managers may forgo projects that they believe would be profitable simply because they do not want to take the risk that the project could fail and lead to a reduction in their compensation. Managers will look after their own interests, even if it means a loss to owners or shareholders.
  • Differential horizons. Managers’ claims on the company are generally limited by their tenure in the company. Therefore, managers have limited incentive 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 because it determines the price at which they can sell their claims on the company. Again, the owners want their profits, while the managers just want to work and earn enough to keep their pockets full.
  • Above investments. Managers may be reluctant to downsize a firm even if it has exhausted available profitable investment projects; they prefer empire building. Managers are also understandably often reluctant to let go of colleagues and friends in divisions that are no longer profitable. Managers who fire their colleagues bear the personal costs (disutility), while shareholders reap most of the benefits. Some managers become friends with their employees and their families and therefore cause problems when they have to fire them or let them go because of slowing down the business. Managers would rather owners or shareholders lose profits than let their friends lose their jobs.

An example would be a company that drilled wells. The owners built the business to be an honest and reputable 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 unfairly by cheating them out of their pay. This caused a lot of conflict between the owners and the manager as the company was losing customers but the manager continued to pay himself high wages.

Another example is a used car dealership in Dade City, where the original owners sold cars in an honest and reputable manner, built a business, and when they hired a manager to take over the business, they started selling cars that broke down a few weeks after the customers drove them off the lot. A manager would not help customers with car repairs like an owner would if he sold a car that caused problems for his customers. The manager sold and reported profits to the owner, creating more profits for himself, but at the same time destroying the car company’s reputation. There was a conflict with the owner and the manager because the owner wanted the business to run one way and the manager wanted to run it another way.

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