Valentin Ivanov is an Estonian entrepreneur and co-founder of an alternative investment fund Quanloop.
It’s common for shareholders and managers to each have separate (often conflicting) goals. If those in power disagree about the direction the company should take, this can quickly devolve into conflict and poor decisions.
Fortunately, founders can help managers and shareholders align their visions by finding common ground. Let’s take a closer look at the problem and potential solutions.
Where Shareholders And Managers Often Disagree
A shareholder’s primary goal is to increase company value, boosting stocks and dividends. While individual stockholders are not directly setting goals, they’ll naturally install conservative directors.
A criticism here is that shareholders may pressure the organization to maximize short-term profitability at the expense of long-term value creation. Another common problem is the tension stemming from the diversity of the group and the impossibility of equitably reconciling all of their interests.
Conversely, managers are more focused on expansion and improving market share. They tend to make riskier decisions, such as investing in new technology, starting ambitious projects or taking on debt, which may negatively affect earnings growth.
Common criticisms are that managers often suppress negative information from shareholders and are unqualified to make major decisions about the company. Yet, when something goes wrong, it’s usually blamed on them, causing friction.
These disagreements can happen in businesses of any size, not just mega-corporations. Similar tension can happen in SMEs or startups too.
How Manager-Shareholder Tensions May Look
1. Corporate-level scenarios
A simple case is the highly publicized relationship between Apple shareholders and CEO Tim Cook. There’s an ongoing legal battle regarding a drop in share prices. Shareholders believe that sales comments from Cook misled them and are suing for compensation because this goes directly against their primary goal: profitability.
At a corporate level, these situations usually involve years-long litigation, slowing the company’s progress. It can also be challenging to avoid this tension because there is such a large board of directors and many different objectives.
Tension in small and medium-sized enterprises (SMEs) manifests as differences between owners’ and managers’ ideas of what’s best.
For example, a restaurant owner may cut costs by changing ingredients, limiting portions or switching suppliers. Managers may buck against these changes because they believe it will affect customer satisfaction and their job.
Here, the owner looks at the bigger picture and considers long-term sustainability from a cost perspective. The manager may not see this viewpoint, which works against the owner’s wishes because they’re “in the trenches.”
The same scenario may arise in micro-enterprises, such as startups, but it can be more insidious because the person in question (often a partner) has equal power. This is like a pair of horses trying to pull a cart in opposite directions. One partner may be focused on brand development and sustainability, while the other is focused on quick profits or fast growth.
In some instances, a person may simultaneously be the owner who wants to grow the business and a “natural person” drawing a salary. There may be a time when the needs of an owner conflict with personal needs (e.g., wanting to grow the company yet needing money for family issues), making it difficult to follow the best business path.
Five Strategies For Finding Common Ground
1. Give management “skin in the game.”
A Harvard Business Review study showed stock options align managers and shareholders, decrease opportunistic behaviors (i.e., using company resources for personal gain) and improve performance.
2. Implement term limits.
Mandatory term limits, retirement ages or assessment tools can incentivize board members to get along with shareholders. It’s also valuable to have a built-in periodic board refresh to encourage transparency, further improving shareholder relations and company performance.
3. Improve board diversity.
A diverse board must go beyond simple racial or gender quotas. To be effective, diversity of thought must be considered from other angles, such as age, board tenure, temperament and socioeconomic background.
4. Listen to the people you’ve hired.
For SMEs, hiring the right managers is akin to having a supportive board of directors. These people will either work with you or against you when trying to steer the company.
First, invest appropriate resources in finding managers who share your vision. It’s a better investment than hiring and replacing the wrong candidates. Second, owners must remember to listen to managers’ feedback. There may be differences of opinion, but the best way to find common ground is to ensure management feels like their concerns are taken seriously.
5. Learn how to reframe disagreements.
It’s possible to teach board members and managers to achieve more collaborative engagement.
One popular study found that participants carrying out three interaction cycles could set aside confrontational attitudes and find common ground.
The first cycle involves reframing a tense interaction as a neutral dialogue. Nobody fights to be heard; everyone acknowledges that both sides should engage respectfully.
The second cycle involves finding points of agreement despite differing perspectives. Establishing this foundation helps both parties understand the motivation of the other.
The final cycle involves both sides calmly seeking solutions that suit everyone. If this process is completed, everyone will be satisfied.
However, there are some practical barriers to implementing these strategies.
For example, only 14% of directors surveyed believe a retirement age of 72 or younger would be accepted, defeating the purpose of regularly refreshing power.
Additionally, reframing is only effective if everyone participates. On both sides, human foibles such as arrogance, indifference and control can add barriers.
Varied Objectives Don’t Have To Cause Irreparable Damage
Companies of all sizes must deal with the realities of being human: We rarely agree on everything, and we all have strong motivations that don’t always align.
Whether the disagreement is between shareholders and board members, owners and managers, or a founding team, unresolved tension can drive a wedge into operations. Understanding the most common pain points and learning new strategies to cope with difficult situations can help both sides find the common ground necessary to keep the company prospering.