Management entrenchment CORPORATE FINANCE
What are the effects of managerial entrenchment?
Managerial entrenchment can have the following effects on a company:
Capital structure
The capital structure of an organization is the sum of its debt, equity, and other sources of funding. If a manager practices entrenchment, they might take on additional debts to raise the organization’s value. This can safeguard a manager’s position within a company and shield companies from outside acquisitions. Additionally, managers may change stock prices for both internal and external shareholders, affecting their costs and the state of the market.
Morale
Entrenchment can also affect employee morale. Sometimes, managers who engage in this behavior employ other managers or workers who can safeguard their roles and obligations. This might lead workers to look for opportunities at other businesses where they might have a better chance of growing in their roles. Employees who observe financial entrenchment may also look for work at firms with more moral business practices. Strong talent leaving a company can have an impact on the overall morale of those who stay and cause them to take on more responsibilities.
Financial performance
Entrenchment can have an impact on financial performance as it frequently has an impact on share prices and investment choices. Managers frequently advocate for increased shareholder contributions or additional debt for the business. An organization free from entrenchment may have better financial performance with their long-term goals with this focus on choices that support a manager’s personal job security and financial status.
What is managerial entrenchment?
Managerial entrenchment is the idea that a company’s executive makes decisions that advance their own interests over those of the company or its shareholders. This frequently entails a purchase or investment decision that gives them more freedom to act on their own. When there is managerial entrenchment, the sole manager frequently portrays themselves as indispensable to the company.
How do you prevent managerial entrenchment?
There are several ways an organization might prevent managerial entrenchment:
1. Hire the right managers
Making the right managerial choices can help your company have a leadership that supports the long-term objectives, principles, and vision of its shareholders. Consider carefully screening any candidates who may make significant financial decisions to learn how they have handled situations in the past. If another manager engages in entrenchment, you might ask a series of interview questions regarding how they would respond. To ensure that a diverse range of qualified candidates have interview opportunities rather than just individuals close to leaders from their previous positions or companies, it can be beneficial to include interviewers from different teams as well.
2. Ensure shared power
Having multiple decision-makers can prevent one person from making choices that would be to their advantage. Decentralization of power can refer to smaller projects where only a few people are involved in decision-making or larger initiatives where leadership from various departments must reach an agreement. Some businesses may also ask non-leadership staff for their opinions in order to promote participation, a diversity of viewpoints, and equal opportunity.
3. Monitor investment procedures
Auditing internal and external investors in a company to ensure fair trading may be a part of monitoring investment procedures. Some companies might consider a co-investment model. This can mandate managers to invest directly in the company. By doing this, managers make decisions based on the success of the company as a whole rather than their own personal interests.
How does entrenchment happen?
When there is a disconnect between the desires of shareholders and managers, entrenchment may occur. Board members frequently suggest future strategies because they frequently communicate what shareholders anticipate from a company. The board may be more likely to support management decisions than shareholder insights if management has personal or other influence over them. Strong governance controls, such as decentralized decision-making and auditing procedures, may make a company more resistant to managerial entrenchment.
What are some indicators of managerial entrenchment?
There are a few indicators of management entrenchment that you might see:
What are common managerial entrenchment strategies?
There are several common entrenchment strategies that managers might employ:
FAQ
What does entrenchment mean in business?
When managers become so powerful that they can use the company to advance their own interests rather than those of shareholders, this is known as managerial entrenchment. “Corporations rely on investors to raise capital, and it can take years to establish and maintain these relationships.”
What is entrenchment in economics?
Management entrenchment is a term used in corporate governance to describe a situation where managers act in a way that only benefits them and not the shareholders.
What is the entrenchment effect?
Morck, Wolfenzon, and Yeung, however, believe that economic entrenchment is a phenomenon that extends beyond the realm of powerful families or oligarchies. For instance, bureaucrats running state-controlled pyramids in France or tiny elites of professional managers in Japan could be compared to similarly entrenched groups.
