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Explain the role of stakeholders in determining managers' behaviours.
That there is a logical dilemma when present when management is hired to pursue a certain objective is obvious. Stated simply, as a particular stakeholder in the organization, the shareholder, how can one be certain that management is pursuing your aims and not their own? The answer, just as simply stated, is that one can easily do so… but it will cost you.
Such a dilemma is at the heart of what is known as “agency theory” and is primarily concerned with the ideas and methods used to align the goals of employees with the goals of owners. In agency theory, there are essentially three different types of problematic issues that can arise in compensating managers:
- Perquisites or empire building - This occurs when the manager diverts resources away form shareholder value-adding activities into items that increase their own physical or psychological well-being.
- Risk tolerance – Managers may have more or less to “lose” than shareholders and thus may have a very different tolerance for risky projects.
- Decision horizons – Managers may be working on a different timeline, i.e., short-term profit, than owners seeks long-term value.
To overcome these potential misalignments, agency theory prescribes a “set-of-contracts” perspective in which there are various explicit controls to guide manager behavior to the owner-desired outcomes. While initially seeming to be an ideal solution, there are of course costs to this as well. Consider the simplified version of a ‘manager’ hired to perform some uncomplicated task. The ‘owner’, to insure that the job was being done correctly could then install ‘systems’ to monitor the managers progress. These systems could be something like another person watching over the manager (or a high-tech version of that, i.e., a remote monitoring device, advanced ‘job technology’ software, etc.). At this point, additional costs are incurred yet the system is not failsafe. Theoretically, if not in reality, the ‘manager’ could collude with the overseer to “don’t but let’s say we did” and split the money. The monitoring process could go on ad infinitem. The owner needs simply to determine the extent to which the process needs monitoring and then, do so up to but not exceeding that level so that it does not wind up costing $10.00 to do and monitor a $5.00 job.
In addition to the owners or shareholders of a firm having a vested interest in the value-maximizing behavior of the manager, there are other types stakeholders. A stakeholder is simply broadly defined as anyone with an interest in the outcome of a particular decision or business and there are many which deserve recognition. Perhaps chief among these other stakeholders is the customer.
The customer is the entity that ‘votes with their dollar’ (or, alternatively with their feet as they go a competitor). While the power of the market is frequently mentioned, its power lies not so much in the individuals themselves rather, it lies in their collective power to either deliver resounding affirmation of product or service or to promptly put a firm out of business.
In terms of directing a manager’s behavior, rather than pursuing an explicit set of contracts as described previously, the customer (en masse) utilizes a manager’s fundamental purpose to create influence. For example, no manager wants unhappy customers so, they seemingly, as if a priori, abide by such proactive customer management philosophies as, “ …managing customer expectations” before the transaction occurs so as to minimize the likelihood of future disappointment.
A third source of shareholder that seek to influence the behavior of mangers are their fellow employees. While there are many very established and often quite relevant and practical theories of how manger’s influence employees, there is less agreement on how employees manage vertically. One very interesting study based upon the dramaturgical perspective of social interactions likened employees to actors that , depending on their goals, use various means and roles to influence managers. For example, the study did find partial support that employees utilized ingratiation techniques in order to gain some personal objective. More significantly, it was found that employees were more likely to utilize “assertiveness, bargaining and higher authority” in further pursuit of organizational objectives.
Another means by which employees can influence such managerial behavior as performance appraisals is by utilizing strategies that actively manage the impressions of the employee. Tactics that create impression upon the manager that, “my employee is like me”, especially when used early in the relationship can be particularly fruitful. These efforts are further enhanced by the perception by the manager that he or she is demographically similar to the employee.
A final means by which employees can influence the behavior of managers is by having a thorough understanding of the means by which the managers are seeking to influence the employee’s behavior. Though there are a number of motivation theories that have validity, one of the most succinct and applicable is that of expectancy theory. In this model, there are three values that affect the degree to which a certain behavior will be performed:
- Expectancy is the likelihood that the behavior can be performed. An example of a behavior with a low expectancy would be a sales goal for a certain out of date of $3M when the best year on record was $143,000.
- Instrumentality is the belief that successful performance is linked with a certain outcome, i.e., a bonus, a promotion, etc.
- Valence is the degree to which the reward is desired. Another bad example that is useful for clarification is the individual who meets every performance goal and every attendance goal to get a promised bonus of a “Employee of the Month” t-shirt… this reward is probably not meaningful enough to properly motivate that type of behavior.
Each of these strategies and tactics illustrated can fit into the broader scheme of agency theory and the set-of-contracts perspective. This perspective includes the rational belief that we are each bound to seek our own personal best interests (with whatever time horizon seems most personally relevant). With this in mind, as owners, customers, employees and even managers, we must consider both the benefits and costs of performance and even that of attempts to influence performance.
Works Consulted
Dreher, G. and T. Dougherty. (2002). Human Resource Strategy: A Behavioral Perspective for the General Manager. McGraw-Hill Irwin: New York, New York, USA.
Guy, W. (1995, June). “Managing and Mismanaging Stakeholder Expectations”. Journal for Quality and Participation (18), 3, pp. 76-79.
Noe, R., J. Hollenbeck, B. Gerhart, & P. Wright. (2000). Human Resource Management: Gaining a Competitive Advantage, 3rd Edition. McGraw-Hill Irwin: New York, New York, USA.
Porter, L., H. Angle,. & R. Allen (eds.). (2003). Organizational Influential Processes, 2nd Edition. M.E. Sharpe: Armonk, New York, USA.
Ross, S., R. Westerfield, & J. Jaffe. (2002). Corporate Finance, 6th Edition. McGraw-Hill Irwin: New York, New York, USA.
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