Question

Why no sence of ownership is reason entrepreneur has less conflict compared to a manager who and an agent of shareholders. (400words)

Answer 1

The managers are agent to the shareholder, who act on temporary arrangement basis fixed incentive component (ignoring the ESOP’s etc), whereas the Entrepreneurs are one who owns the company or the part of the company. As managers acting merely as agents have little or no sense of ownership being the reason of conflict i.e between the agent and principal (in this case it is shareholders). However, in the case of the entrepreneurs who mainly are principal or in a crude sense can be called shareholders have less conflict, because they run the business in the organizational set-up as per their wish, and are not dependent on any agents to full-fill their wish and demands.

The managers might look at the short term gains or figures which shows the company in the good light, which might have strategic repercussions (i.e. long term) as being an agent they will have benefit in showing short term benefits as their incentives and bonuses are linked to it, whereas an entrepreneur would take decisions that might not be beneficial for a short term, but would be good in long or strategic terms. This is one of the main reasons what conflict of interest between shareholders and managers are witnessed so much and is less in entrepreneurs.

Coming on to the recent developments in the role of independent directors whose sole idea is to check on the day to day workings than shareholder (or the principal) might not be aware of, which obviously has helped to reduce the conflict between the principal and agency. No sense of ownership involves rash or reckless decision at times because the stakes for the agents are not as much as compared to those of principals. With the above conjectures and examples, it could be said that as the sense of ownership increase the sense of conflict reduces.