Managerialism

Fundamentals

According to management theory, management positions—most notably executive positions— are rightfully and necessarily power laden. Executive managers must exercise power in order to execute their responsibilities within a context of uncertainty and competing interests. As those occupying executive positions are entrusted with decisions that are complex, nonprogrammable, and significant in their impact; the criteria for selecting executives should include the requisite judgment needed to make such decisions. Those in executive positions should therefore understand the nature of their responsibilities and should meet these responsibilities through the execution of sound judgment and the appropriate use of power. Also, according to management theory, executives should be accountable for their decisions and actions, and their discretion or latitude is limited by a series of exogenous (i.e., legal, ethical) and endogenous (organizational, personal) factors. Therefore, managerial power should be substantial but should also be limited by checks, balances, and constraints.

In the early 20th century, Adolf Berle and Gardiner Means detailed the emergence of a force that challenged the assumption of adequate checks and balances. Many large U.S. corporations, which had started as private entities owned by a few, had become “modern,” publicly held corporations whose stock was traded in public equity markets. With public market trading and the liquidity it offered in the buying and selling of stock, there were now many owners of a given corporation, with many owning relatively few shares of its stock. Corporate ownership had become passive and diffused. As the concentration of ownership among a few large [Page 478]owners or block holders indicates active, controlling ownership, an implication of the diffusion was that owners had much less ability to control the firms in which they had invested. Ownership and control had become separated, and something was awry in terms of checks and balances on corporate management. Those employed as corporate managers were often managing and controlling the firm, and the age of managerialism had begun.

The concept of managerialism is inherently normative; it is embedded in the legitimacy of managerial power and control relative to others. Responses to managerialism regard how executives should prioritize the interests of various constituents and their own self-interest in managing the corporation. The response to managerialism based on agency theory rests on reestablishing the dominance of owner control over manager-agents. Agency theory puts forth that if left to their own devices, managers will overly diversify and overly grow their firms at the expense of shareholders and shareholder value maximization. Agency theory-based solutions to managerialist tendencies include monitoring managers, incentivizing them to think like shareholders, and empowering boards of directors to replace errant executives. Agency theory assumes that the corporate control system will continue to evidence a tendency toward managerial self-interest, as self-interest is a basic assumption about human behavior. Yet agency theory espouses that maximizing shareholder value is the appropriate overarching corporate goal and corporate governance mechanisms, such as executive compensation, and the board of directors can keep management on track toward achieving it.

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