Owners and managers

BS OPINION

It goes without saying that when owners and managers pull in the same direction, and are driven by the same values, a company tends to be well run. But when they are at loggerheads, things can get dicey (Wadia-Danone Vs Sunil Alagh).

Usually, in such cases, it is the professional manager who has to make an exit. Owners make exits only when they have already run the business into the ground, and lenders are forced to show them the door.

Coming from this perspective, it's easy to fall into the trap of posing the issue in either/or terms. Who can manage better, owners or professional managers?

The argument in favour of the owner-manager is simple: since he has more at stake, he has a higher incentive to manage better compared to a professional manager, who anyway is a hired mercenary. He may be more interested in positioning himself for the next job than finding ways to build long-term value for stakeholders.

The argument in favour of professional managers is that they are better trained, and hence better qualified to run businesses. More pros and cons can be added to each side, but it won't get us anywhere. For the reality is that we have seen as many successes and failures in each case.

We know from real-life Indian experience that scores of owners destroyed value by mismanaging their companies and/or siphoning off money to private entities.

But we also know that they have brought the crucial spark of entrepreneurship that has made all the difference (Venu Srinivasan at TVS Suzuki and Dr Anji Reddy at Dr Reddy's Labs).

Equally, we know from recent US experience that professional managements can demolish value as efficiently as anyone else by excessive greed (Enron, Worldcom, et al). But at companies like Hindustan Lever, it is professionals like M.S. Banga who provide the entrepreneurship needed to make their companies big winners.

That's the point. What separates good companies from bad is not whether they are run by owners or managers, but whether the owners are professional enough and the professionals think enough like owners.

Owners without professionalism will fail even if they recruit the best IIM graduates. Conversely, professionals who can't think beyond their own careers and short-term gains will not add value even if you give them loads of ESOPs.

This is the main lesson learnt from recent tales of corporate misgovernance in the US, where top managements fiddled with quarterly numbers to drive up short-term share values and rake in millions through stock options.

In sum, there can be good owners and bad, just as there can be good professionals and bad. Seen in this light, the owners versus managers debate is sterile.

These are roles that need to be played by someone or the other; it matters little who plays them as long as they are played well. Sometimes, the same person can play both the roles.

But the key to excellence is knowing your limits, and what complementary skills your company needs. That applies equally to owners and managers.