10 Pages, Grade: gut
I. Business Scandals Caused by Managers
II. Corporate Ownership
III. Corporate Management
3. Are Stock Option Programs a Satisfying Solution for Both ?
Bremer Vulcan Werft, Enron, Worldcom or current Bank für Arbeit und Wirtschaft (BAWAG) and Hypo-Alpe-Adria Bank: Although in totally different branches working, these companies belong together. They stand for a big number of business scandals that often lead to bankruptcy of the involved firm. And, additional they all were run by managers not owners of the business. In the current scandal affecting the Austrian Bank für Arbeit und Wirtschaft Hermann Kepplinger, a politician from Upper Austria, analyzes in a press comment: The group’s managements have nearly unlimited power. “Former the owners had the power; in multinational groups today the employed management and not longer the owner of the capital are the real leaders. Because a multinational group cannot be run and controlled by its owners – the shareholders. (…) Supervisory board meetings are ritual events. A shareholder meeting is similar to a Baptist service. The power of the managers is not ruled in any way; to this point belongs that they decide nearly for their own will about their salary by cash or share buying rights. A payment, that particular is similar to theft. The fairytale of control by owners and business run in interest of the stock-owners are tenacious.”
As this is a strong judgement over managements, I would like to discuss in this paper if there really exist differences and problems in comparison of ownership-run business and management-run ones.
In literature for corporation ownership a number of advantages are stated. To shown up potential problems between owners and managers I would like to mention advantages and disadvantages of owner-run businesses as well as manager-run ones, because the interests of shareholders as owners are the same as the interests of single or dominating owners.
First I found that the nineteenth century factory as an owner-run “was an effective producer since the owner (who wants to maximize his profits) was one in the same with the manager (who made actual day-to-day decisions).” The owner defines the company’s purpose, subjects and values. The most important goal for the owner of a company thereby is to maximise his return on capital invested in the business. Boetticher mentions, opposite to managers this will be the only subject for a businessman as an owner of a corporation. As newer research seems to show, this is not the whole story. In a study about performance and success of family-run companies it was found out that these firms have an extraordinary high level of social and regional welfare commitment. In consequence the whole regional welfare increases. Further family-run businesses often belong to the most successful in their branch. One of the reasons, beside modern leadership, is that for private owners the company always has first priority. Additional research of Alliant Consulting shows that employees often like to work for such enterprises because of several reasons.
Actually there are not only advantages in corporation-ownership. As profit maximisation is the most important motivation for acting of an owner, they tend to accept higher risks just for earning more money. Often if a transaction fails the whole company is poorly affected and in several cases this was the reason for bankruptcy. In addition corporate owners often are resistant against external advice. The research about performance of family-run businesses in consequence shows that 31% of these companies in Germany are affected by serious problems.
Additional often staff is unsatisfied with the situation and thinks about leaving the company. The reasons mentioned are:
- “Values disconnected
- Sense of disempowerment
- Perception that owners’ needs placed ahead of company
- Relationships matter more than good business
- Limited career path”
Managers are not the one’s who invest their own capital, but run the business for a definite time on behalf on the owner(s). So they are responsible for the company and the capital the owners invested. As result managers tend to accept in comparison with corporate owners to accept a lower risk and demand a high safety standard for achieving profits. This way of acting has different reasons:
- The control of manager’s action makes sure that risk is accepted only in definite scale. Both decision finding in a collegial way and control of the supervisory board are responsible. (Actually control does not work in every case like current bank scandals show.)
- As corporate policy is influenced in certain ways and interests of several institutions have to be considered decisions are intuitional limited. The wishes of the whole society, federal government, central bank and the money and tax policy of these institutions have to be considered as decisions of big multinational groups often strong affect a single state. At least general meeting has control and decision power. So managers are not totally free in their way of acting.
As result this leads to better decisions that are just right to increase the economic welfare.
Further “free market has inherent remedies for (…) ill-behaviour on the part of the ‘hired-gun’ managers. At least four offsetting influences will tend to mitigate the dichotomy of interests:
First, any abused passive investor can always sell his share of stock in such a corporation. While this will not save the investor from past personal losses he can at least extricate himself from the abuse. But if the response is widespread, the effect of many small investors selling their stock will put downward pressure on the price of the stock. A reduction in the price of the stock will surely get the attention of the major investors who do not involve themselves in the decision making of the corporation—the board of directors, if no one else—who can take meaningful action!
Second, it is very, very common for managers to be paid in stock options (see below, the author). Thus the managers are owners (…); a conjoining of interest!
Third, who would the board of directors—as owners interested in profit-maximization—choose to manage their corporate assets? A ‘natural selection’ process will occur in the market as those managers who have shown their determination and ability to create profits will be promoted (…).”
Especially John C. Bogle states several disadvantages of the management system instead of owner leadership. That’s what he says: “When most owners either don’t or won’t or can’t stand up for their rights, and when directors lose sight of whom they represent, the resulting power vacuum quickly gets filled by corporate managers, living proof that Spinoza was right when he told us, ‘nature abhors a vacuum.’ Put more harshly, in a quote that I came across last month, ‘when we have strong managers, weak directors, co-opted accountants, and passive owners, don’t be surprised when the looting begins.’
Of course the actual looting we know about has been small. But when we consider the staggering levels of compensation which we pay our chief executives—the average CEO’s compensation has risen from 42 times that of the average worker in 1980 to 121 times in 1988, and to an astonishing 531 times in 2000 (now it’s ‘only’ about 411 times)—it’s certainly fair to say that there has been an extraordinary increase in the portion of corporate earnings that corporate managers have arrogated to themselves. (…)
From 1988 to 2001, executives promised investors growth in operating earnings that averaged 12%, but delivered only 3.5%-less than the 5.5% annual growth in our nation’s [the U.S., the author] GDP for that period. (…) Much of the compensation increase has been fueled by executive stock options” – if such programs can be solution of the described problem is discussed in the following paragraph.
The described way of action and the likely ways of acting of owners and managers lead to the following statement: “The firm will not be efficiently managed for consumer benefit but will result in management taking advantage of the owners for their (the managers’) personal benefit. From this viewpoint the statisticians argue for regulation and denunciation (…). The dichotomy of interests which does exist between the owners and the managers; a dichotomy which also exists even with a single owner and a single-employee sized firm. The owner will be diligent in his behaviour, whereas the employee does gain the personal benefits from slacking.”
A potential solution may be to share ownership with managers – they won’t be hired employees no longer, but owners and in result they shall act in the same way owners will do. This is the most important reason for implementing stock-option programs in big companies.
The owner of stock options can participate in the company’s success, if profits increase and the company’s shares in consequence are worth more money. Logically the management will act in a responsible way and work for better monetary results. As the current shareholders are interested in increased gain, too, the result is a conjoint of interests of both – owners and managers. Another important reason is to attract the possible realizable sum of the executive’s compensation. Since American managers earn millions of Dollars in several years, managers of European companies are likely to change their employer. As an example, the software producer SAP has lost at least 27 top-managers within a relatively short period that were hired by an American competitor. As a consequence a new and more attractive stock-option program was designed.
There are some different ways to implement such a stock participation program. The first way is a stock-option program. This is a common solution were employees (including the management) have the right to buy company’s shares for a definite price up to a definite time. If share price has risen, the option owner has realized a profit. Another common possibility that is well accepted by staff and managers is to reserve a part of shares that are placed on market. However, this only works if a company goes public or raises its capital resources by placing new shares. At least the employees can participate by employee-shares. In this way they get shares for a reduced price or even free. As shares only are valuable if the business works successful, managers even have a motivation to increase profits. On the other hand, some sources mention this conjoint of interest does not actually exist: “But the fact is that there is no such linkage. Rather than holding onto their shares, executives typically sell them at the earliest moment the options can be exercised, too often leaving the shareholders holding the bag.”
As a result I cannot state if the difference between owners and managers interests can really be solved by stock-option programs. I personally believe in the last statement: The managers income increases while dividends for owners are likely to persist on the same level.
Boetticher, Karl W.:
Unternehmer oder Manager, G. Grote’sche Verlagsbuchhandlung KG, Köln und Berlin 1963
So würde John K. Galbraith den Bawag-Skandal kommentieren... in: Der Standard, Wien, April 01, 2006
Bogle, John C.:
Owners Capitalism vs. Managers Capitalism (June 11, 2003), http://www.vanguard.com/bogle_site/sp20030611.html (April 02, 2006)
Owners vs. Managers http://www.conciseguidetoeconomics.com/book/owners-vs-managers/ (April 02, 2006)
Retention of Top Talent in a Family-Owned and Managed Business http://www.alliantconsulting.com/SNA_2_28_206.ppt (April 02, 2006)
Familienunternehmen: Schmaler Grat zwischen Erfolg und Pleite (March 22, 2006) http://de.biz.yahoo.com/22032006/295familienunternehmen-schmaler-grat-erfolg-pleite_yahoo!-nachrichten.htm (April 02, 2006)
SAP plant Aktienoptionsprogramm für Topmanager (November 30, 1999)
http://www.golem.de/9911/5343.html (April 08, 2006)
http://www.hlfr.de/d/aktuelles/download/liebsbroecker_-_miarb.doc (April 08, 2006)
 Kepplinger, Hermann (2006) in: „Der Standard“
 See http://www.alliantconsulting.com/SNA_2_28_2006.ppt
 See http://vanguard.com/bogle_site/sp/20030611.html
 See Boetticher, Karl W. (1963), page 139
 See http://www.de.biz.yahoo.com/22032006/295/familienunternehmen-schmaler-grat-erfolg-pleite_yahoo!-nachrichten.htm
 See http://www.aliantconsulting.com/SNA_2_28_2006.ppt
 See Boetticher, Karl W. (1963), page 133
 See Boetticher, Karl W. (1963), page 133 f.
 See http://www.conciseguidetoeconomics.com/book/owners-vs-managers/
 See http://www.golem.de/9911/5343.html
 See http://www.hlfrde/d/aktuelles/download/liebsbroecker_-_mitarb.doc
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