It is a generality in business that owners and managers look at the company “through the same eyes” and that the same “appropriate action” would be chosen by either group. This is not supported by practice, experience, research or logic.

Management may elect, say, a Total Quality Management (TQM) strategy because based on their knowledge of their market, quality is the differentiator between the customer opting or not opting to purchase the company’s product.

From a corporate perspective this seems reasonable. However, TQM is expensive to implement, takes time to come to fruition and often carries considerable risk. An investment in TQM is necessarily borne by shareholders, at least until its benefits “kick-in”.

If shareholders of that company have longer-term objectives, then a TQM strategy may enhance those objectives. But what if those shareholders have a short term cash dividend objective? Clearly, a TQM strategy would be to their disadvantage, irrespective of what management determines is “good for the company”.

If management is faced with a desire to embark on a TQM strategy when shareholder objectives are long term, then an investment in such a program seems relatively straight forward – go and spend the money needed.

But when management wants TQM but shareholder objectives are short term (eg dividend growth), then the challenge is different - to enhance quality AND continue to pay dividend. This paradox therefore requires innovative solutions in the same way that Honda resolved the paradox between quality and cost.

Spending the funds in the long-term scenario detracts from shareholder satisfaction in the short-term scenario. Similarly, short-term dividend-focussed strategies may be redundant, expensive or higher risk in the long-term context.

Different perspectives of owners and management as to strategy or policy (let alone outcome) causes tension between the two groups. This tension is fuelled by differing motivations of the two which when applied to the formulation of corporate destiny, has the potential to create great disharmony or dissatisfaction.

The principal reason that owners invest in a corporation is to fulfil their own specific objectives, that generally relate to wealth creation and its maintenance. The principal reason that managers are involved in a corporation (where they have little or no equity) is because management is a manager’s profession. The issues and outcomes that enhance or detract from a manager’s professional standing are not the same issues or outcomes that create or maintain wealth.

For example, the way that managers are perceived as effective or “good” is generally in comparison with peers. Therefore, managers will understandably strive to perform well on measures that help that assessment, such as industry or sector ratios. A manager may be considered as the most effective in the industry or sector if, say, his ROI is the highest in the sector. But what if the high ROI is achieved through high gearing and high risk? And what if shareholders are risk averse and require low gearing?

There is considerable evidence to support the contention that managers and owners do not share common objectives and perspectives. That their objectives and perspectives differ, is normal and to be expected. However, not understanding that they differ is both naive and dangerous for shareholders and their expectation for certain outcomes.

A recipe for potential disaster is created when management is biased toward certain tools, techniques and strategies needed to operate the corporation optimally.
The solution to this dilemma is to define shareholder objectives in quantifiable terms; use these metrics as the core element of the corporation’s mission statement; and then ensure that all tools and techniques chosen by management are assessed against the mission-metrics to ensure that they contribute to or enhance shareholder objectives.