Owners and managers

THERE IS some truth in the statement that the difference between an owner and a manager of a business, including a conglomerate, is that the former manages his own money and the latter, other people’s. This then presumes that between the two types, the one less likely to be prudent to the point of being reckless in spending, including in the pricing of acquisitions of assets or other companies, is the one who is managing other people’s money.

However, the distinction between owner and manager is not all that clear-cut. Private equity partnerships that acquire companies cannot really be said to be owners, though they are listed as such. They do not, after all, bet their own money, except a little of it and sometimes in the form of “carried interest” which comes to them as brokers of the deal. In using debt in leveraged buyouts, these “owners” too use other people’s money. Are owners in this case then to be lumped with the manager who has no “skin in the game,” or just a bit of a fingernail?

With the IPO, original owners sell a slice of their company to public investors. Also, in secondary offerings, majority owners shed shares in overnight placements to invite a strategic investor or increase their public float, otherwise known as cashing in. Do the owners that have lightened up evolve afterwards into managing other people’s money?

Here are some characteristics of managers controlling companies they don’t own, or only own a token percentage through stock options:

The executive pay is richer. There are all sorts of kickers in the variable pay and bonuses for targets exceeded, which are, of course, set at a low bar. This is because generous packages at the lower levels ensure even richer hauls at the top. Does this mean they attract top talents or just more supporters of their position?

Donations follow advocacies and favorite charities of the top manager. This largesse for “worthy causes” further enhances the manager’s social cache, especially among beneficiaries.

There are no succession plans in place. Why exit when the going is great? Succession plans breed plotters who undermine the status quo.

What about companies managed by owners?

There are more executives with the same surnames, or maiden names when it comes to married women.

There are designated outside service providers and suppliers that deal with the company with only a semblance of bidding for meeting standards and price advantages. Why share the dividends with other stockholders? There are many ways to take out the money.

Heirs-apparent are picked early and serve as second-in-command, unless there are factions in the controlling family.

The distinction between owners and managers has been reduced to a status issue, never mind how blurred the difference is becoming based on whose money is being used. This is no longer a question of who has more wealth and a more prestigious address, as it is possible for a manager with his guaranteed pay, bonuses, stock options, and use of corporate jets and first-class hotels to seem even wealthier than an owner, or majority stockholder, of even a big business with no private hangar.

More than wealth comes power. If a businessman can move markets and attract ambush interviews on his acquisition plans, it doesn’t seem to matter whose money he is using. Even supposed owners cannot shell out from their wallets the funds needed for capital expenditures. Other people’s money from various sources always figures in major moves.

Still, one can surmise that there seems to be a higher risk of losing personal wealth and prestige in the case of the owner even if he calls on funds from other sources. A company he built (and identified with him) which started with his family’s money bets differently on the future. If he makes a wrong call, it is not just his salary and bonuses that he risks but his standing in the family. After all, exit packages of fired CEOs of even bankrupted banks can boggle the mind, financed of course by other people’s money, as in the States in 2008, the government’s bailout funds.

The question of who owns the money invested in the company may be moot. With expansion and the infusion of capital from the outside (banks, investors, acquiring interests, venture capitalists, strategic partners) there is little distinction between owners and managers. What matters is not whose money it is... but who controls it.

The distinction between owners and managers has been reduced to a status issue... This is no longer a question of who has more wealth and a more prestigious address, as it is possible for a manager with his guaranteed pay, bonuses, stock options, and use of corporate jets and first-class hotels to seem even wealthier than an owner.

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