Owner-manager conflict can result in loss of productivity, loss, and even dismissal of the firm. There are at least five sources of conflict that can arise between owners and administrators
- Choice of effort. The extra work of managers usually adds to the value of the firm, but because managers spend on that effort, the extra effort reduces their efficiency.
- Take perquisite. It is in the interest of employers to pay adequate salaries and bonuses to attract and retain competent managers. However, owners do not want to pay managers too much. On the contrary, managers want not only higher salaries but also special club membership, luxurious office furniture, luxurious automobiles, day care for children and expensive French confectionery. Managers may be overpaid while underpaid employees may be underpaid, leading to conflicts of interest, resulting in loss of productivity and, ultimately, business closure.
- Exposure to various hazards. Managers usually have a significant level of human capital and personal wealth invested in the firm. This huge investment can put managers at extreme risk from the point of view of owners, who (at least in a large public corporation) usually spend only a small amount of money in any firm. Therefore, managers may abandon projects they expect to be profitable because they do not want to bear the risk that the project will fail and their compensation may be reduced. Managers will look after their own interests even if it means harming the owners or shareholders.
- Managers’ claims on Horizon Corporation are usually limited to their tenure with the firm. Therefore, managers have limited benefits for cash flow management beyond their tenure. Owners, on the other hand, are interested in the value of the entire cash flow chain in the future, as it determines the price at which they can sell their claims to the company. Once again the owners want their profits while the managers just want to work and do enough to keep their pockets full.
- Most investment managers are reluctant to downsize the firm, even if it has scrapped lucrative investment plans. They prefer empire building. Also, managers are often reluctant to consider leaving colleagues and friends in divisions that are no longer profitable. Managers who fire their colleagues bear personal costs (instability), while shareholders reap the most benefits. Some managers make friends with their employees and their families, which can lead to problems when they have to leave or let them go because the business is slow. Managers lose profits from owners or shareholders instead of losing their friends.
An example of this would be a company that digs water wells. The owners designed the business to be an honest and reputable business but after retiring and hiring a manager to run the business for them, the manager had an idea of how to run the business. They were not as honest as the bosses and were dishonest in hiring employees. This caused a lot of controversy between the owners and the manager because the company was losing customers but the manager continued to pay higher wages than himself.
Another example is the used car lot in Dodge City, where the original owners sold cars in an honest and reputable way to strengthen the business, and when he hired a manager to run the business, the manager Began selling cars that were in disrepair within weeks. Users took them too far. The manager will not help the customer in fixing the cars as the owner did if he sells a car which will cause trouble to his customers. The manager was selling and showing the owner a profit so he was making a big profit for himself but at the same time he was tarnishing the reputation of the car. There was a dispute with the owner and the manager because the owner wanted the business to run one way and the manager ran it differently.