Owners v. Managers

Just how much influence should owners have over the running of their own business?

 

I was once asked at an interview for an MD’s job what I had achieved in my career to date. The interviewer, a well known UK businessman, made it clear that being a salary man wasn’t much of an achievement compared with what he had done, but for some reason he still wanted to hire me. It’s a fact of business life that if you want to own more than a one-man business you need to apply leverage by employing people and you are unlikely to find anyone quite like yourself.

Entrepreneurs need managers. But some, often the most successful ones, are pickier than others when it comes to hiring. Mitchells & Butlers the pub and restaurant company that owns All Bar One, Harvester, Toby Carvery, and several others, is having a hard time finding a chief executive and there have been 30 or so boardroom changes over the past three years. It is suggested by some that this lack of continuity contributed to a 23 per cent fall in M&B’s share price last year, although the company has recovered some after good Christmas trading.

There is always a tension between owners and managers arising from their often different objectives. Owners want to maximise shareholder value and managers want to maximise their own returns, the classic ‘agency’ dilemma. This is a topic in vogue at the moment with banks. To my mind this is also a problem in many other sectors and, overall, managers can often do better than shareholders do in this battle for a “fair” share of the profits. This is because many of us are indirect owners and we have other agents, those who look after our money for us, to further distance us from our investments and take their share too.

In M&B’s case, it is 23 per cent owned by a very successful British entrepreneur, Joe Lewis, this means there is a much closer link with management and Lewis seems to be a hard man to please. To my mind that is a very good thing and we should all be a little more demanding of the managers of businesses we own – directly or indirectly through pension funds and the like. We should demand evidence of success rather than being swayed by reputations. And we should put in place far more direct links between success and rewards. I don’t think it’s as difficult to do as we are all told. If in doubt, watch Moneyball, starring Brad Pitt, a great film about the difference between reputation and performance.

Owners should be more like Lewis and get directly involved in the performance of their investments, if they want better returns, or they must accept that managers will take a disproportionate share of the profit instead.

Mark

 

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