Managerial Goals

Managerial goals may be different from those of shareholders. What goals will managers maximize if they are left to pursue their own rather than shareholders' goals?

Williamson proposes the notion of expense preference.6 He argues that managers obtain value from certain kinds of expenses. In particular, company cars, office furniture, office location, and funds for discretionary investment have value to managers beyond that which comes from their productivity.

4These are the words of Chief Justice John Marshall from The Trustees of Dartmouth College v. Woodward, 4, Wheaton 636 (1819).

5M. C. Jensen and W. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure," Journal of Financial Economics 3 (1976).

6O. Williamson, "Managerial Discretion and Business Behavior," American Economic Review 53 (1963).

16 Part I Overview

Donaldson conducted a series of interviews with the chief executives of several large companies.7 He concluded that managers are influenced by two basic motivations:

1. Survival. Organizational survival means that management will always try to command sufficient resources to avoid the firm's going out of business.

2. Independence and self-sufficiency. This is the freedom to make decisions without encountering external parties or depending on outside financial markets. The Donaldson interviews suggested that managers do not like to issue new shares of stock. Instead, they like to be able to rely on internally generated cash flow.

These motivations lead to what Donaldson concludes is the basic financial objective of managers: the maximization of corporate wealth. Corporate wealth is that wealth over which management has effective control; it is closely associated with corporate growth and corporate size. Corporate wealth is not necessarily shareholder wealth. Corporate wealth tends to lead to increased growth by providing funds for growth and limiting the extent to which new equity is raised. Increased growth and size are not necessarily the same thing as increased shareholder wealth.

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