Block 5

Question 1

Agency Problem

Answer 1

That managers might only be concerned with doing any or all of these things if there is something in it for them

Question 2

Peter Drucker: What do Managers do?

Answer 2

Drucker (1909 – 2005) was one of the management thinkers to depict management as a distinct function within organisations. Drucker defined the manager’s work in terms of 5 basic functions or operations.

He said that a manager:

1. Sets objectives: Managers are routinely required to decide what needs to happen in the future and set the goals to get there, both for themselves and others. This can range from the sorts of large-scale strategy exercises which make plans years ahead, to more immediate plans for action this month, this week, or even today.
2. Organises: Drucker was thinking about implementation here. He believed that a primary function of a manager was to make optimum use of the resources required to enable the successful carrying out of plans.
3. Motivates and communicates: This function is very people-focused. Here, a manager will determine what needs to be done in a situation and then get people to do it using a range of communication and motivation tools and skills. Drucker said that the manager ‘is uniquely expected to give others the vision and ability to perform.’ Motivation and communication allow the vision to be shared.
4. Develops people, including him/herself: Another people-based function, Drucker believed that managers had a responsibility for learning and development. It is through development that people are given the ability to perform (referred to above).
5. Measures: A manager will need to check progress against plans, taking corrective actions (through the other functions) where necessary. We will be returning to the idea of measuring and monitoring later in the chapter.

Drucker’s work was ground-breaking at the time; whilst it may seem common sense today, that is testament to the way in which his ideas have been absorbed into our way of thinking about management

Question 3

Criticisms of Drucker

Answer 3

• doesn’t give clarity or guidance on how long a manager does spend, or should spend, on each activity.
• No granular detail which allows us to understand how managerial roles differ from one another or across a specified time frame
• making management look relatively straightforward and full of scientific method, as though it is possible to exact control over a complicated environment through e.g., planning, measurement, good leadership and clear communication

Question 4

Henry Mintzberg: What do Managers do?

Answer 4

Mintzberg said that there were six characteristics of managerial work:

1. The manager’s job is a mixture of regular, programmed jobs and unprogrammed tasks. Mintzberg says that the manager does not just undertake the sorts of organised, planned tasks that Drucker talks about, but is also concerned with plenty of exceptions to the rule, having to deal with those as and when they come up, often in ad hoc ways.
2. A manager is both a generalist and a specialist. A manager will need to have specialist knowledge in their specific field, industry or discipline, but also general knowledge in order to be able to deal with complex problems. It may be hard to categorise the necessary skills and knowledge into a simple list of what a manager does.
3. Managers rely on information from all sources but show a preference for that which is orally transmitted. Rather than being the sorts of meticulous planners, measurers and controllers that Drucker talks about, managers are more likely to make use of oral information. It may be that this has changed in the information age, and this finding may need revisiting in light of social media, emails, and so forth. However, Mintzberg’s real point here is that managers do not make as much use of the sorts of organised, neatly measured data sources as Drucker suggested.
4. Managerial work is made up of activities that are characterised by brevity, variety and fragmentation. Mintzberg noticed that managers frequently have to swap from one task to another, to another. They rarely have the sort of time to be able to sit and measure, plan, or set objectives. They act rapidly.
5. Management work is more an art than a science and is reliant on intuitive processes and a feel for what is right. Again, rather than planning, objective setting and measuring being at the heart of what managers do, they are often working interpretively, using their instinct and senses to arrive at what they feel is the right decision, rather than necessarily using data to calculate what might be the right decision.
6. Management work is becoming more complex. There was no sense in Drucker’s work that the field of management was changing at all. However, Mintzberg, writing in 1990, may have observed the growing amount of information that managers need to deal with and understood that this would have a fundamental impact on the way that management might be practised in the future. Drucker didn’t recognise that management might change in the future.

Question 5

The Principal Agent model

Answer 5

The principal–agent model operates with assumptions about behaviour and stylised actors as follows:

1. There are two sets of actors in the firm. Principals are the shareholders in the firm and agents are the managers. They are called ‘actors’ in the model because they are both able to take actions and change organisational outcomes as a result.
2. Actors aim to maximise their individual utility. This means that both the principals (shareholders) and agents (managers) are trying to extract the greatest value from the relationship.
3. The agent acquires information that is not available to the principal and consequently may act against the interests of the principal. For example, the manager may know a faster way of processing bills but choose not to tell the principal because implementing the new system would make more work for the manager.
4. This generates information asymmetries which are the basis of moral hazard. Information asymmetries are generated because one party knows more than the other party. Moral hazard is when either party does not act in good faith, bending or breaking the terms of a contract.
5. The principal monitors the agent to prevent this. Monitoring can involve a whole range of different initiatives, including extra layers of management, regular appraisals, a need for managers to report finances on a regular basis, phone calls to check that the manager is in the office at a particular time, CCTV on the factory floor or recording customer service phone calls to make sure that everyone is working as they should.
6. The purpose of monitoring is to exercise control over the agent by acquiring information about the agent’s actions. Monitoring acts as a control mechanism for two major reasons: 1. Principals can punish agents who act out of turn and 2. Agents will be disinclined to act out in case they are caught.
7. Principals compare the benefits and costs associated with each outcome and are unconstrained in their ability to compute infinite amounts of information. The model has to assume (or it doesn’t work) that principals have the ability to compare every single benefit and every single cost associated with every single monitoring combination.
8. Principals seek to achieve an optimal solution in which production is maximised. They can then use all the information to achieve the perfect, optimal solution, where the agent’s production is maximised. In other words, the benefits of production minus the costs of monitoring add up to the highest possible amount of any scenario.

Question 6

Using Principal-Agent Theory

Answer 6

Under Principal-Agent Theory, the firm is thus seen as a collection, or ‘nexus’ of contracts between principals and agents (Jensen and Meckling, 1976). The focus of the theory is on the contracts and relationships between the individuals. These individuals – both principals and agents – are interested in optimising their own utility. However, they have different interests to one another. It is feasible, under PA theory, that a manager might choose to work as little as possible for as much money as possible. And, a shareholder might choose to extract maximum profit out of the firm regardless of the damage it has on the people in that firm.

Question 7

Implications of trying to solve The Agency Problem

Answer 7

if accounting numbers are socially constructed, and can be manipulated, then there it can be problematic to use them to monitor the actions of managers (Miller, 1994). Using financial monitoring is just the same as using any other form of monitoring: no more than a partial solution at best. The Agency Problem remains intractable

Question 8

Comparing and Contrasting Management Theories

Answer 8

If we look just at principal-agent theory, we see managers as full of guile. If we look just at the work of Drucker, we see managers as highly organised workers who are in the service of the firm. If we look just at the work of Mintzberg, we see managers as reactive, and spontaneous, and yet still in the service of the firm. And, if we look at Taylor, we see managers as rational planners who can organise and oversee the workforce without issue.

As such, each of these four theories can be seen to expose the weaknesses of the other three:
• Mintzberg shows Drucker and Taylor to be problematic as they suggest a level of planning and organisation that is unrealistic.
• Drucker and Taylor show Mintzberg to be entirely focused on what managers do rather than perhaps what they should do.
• Taylor’s theory shows Drucker to be very broad brush and non-scientific in his prescription of management activity.
• Taylor may be impressed by Mintzberg’s study of real work, but would no doubt have issue with the lack of prescription and failure to focus on the need to link performance and remuneration.
• Mintzberg and Drucker show principal-agent theory to paint a very negative picture of managers
• Mintzberg and Drucker also show Taylorism to paint a very negative picture of workers, who common-sense tells us are not always quite so self-serving.
• Principal-agent theory tells us that perhaps Mintzberg, Drucker and Taylor are a little naïve because they do not pay any attention to the fact that the manager’s aims may be different to that of the organisation in question and that they may accordingly act in their own self interests (‘with guile’)