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Managerial utility maximization by Williamson and Growth Maximization by…
Managerial utility maximization by Williamson and Growth Maximization by Robin Marris
Williamson's Theory of Managerial Discretion- owners and managers are two separate groups and that managers look at self interest when making decisions for the firm.
Owners & Shareholderes
Aim is to maximize profit and higher dividends
Managers
Other objectives: maximize their own utility (self interest)
For their job security- attempt to ensure a certain minimum of profit to shareholders in the form of dividends. Thus, profit is a constraint to the manager's discretion. (Managerial discretion is the latitude that executives have to affect the activities of the companies that they run.)
Utility depends on variables such as salary,job security, power, prestige, status, job satisfaction. Only salary can be quantified. Hence William uses only measureable quanities in his function.
Williams Function:
U=f(S, M, ID) where U is the utility managers aim to maximize; S is the staff expenditure like salaries; M is the managerial emolument which includes benefits like personal secretary, expensive luxury offices etc increasing status and privelege; ID is Discretionary Investment: fund remaining after providing dividends to shareholders and paying taxation to the government.
Profit: actual profit- S-R-C (sales revenue-production costs-staff expenditure)
Reported profit- profit firms report to the tax authorities; actual profit less tax deductible managerial emoluments
Criticisms:
-Underestimated the concept of profit maximization; managerial utility is impossible to maximize if economic profit is maximized by the firm
-only applies when rivarly amongst the firm is not so strong.
Marris proposed that owners (shareholders) aim at profits and market share, whereas managers aim at better salary, job security and growth.
The owners want to maximise their utility while the managers attempt maximisation of their own utility.
Owners being interested in the growth
of the firm want maximisation of the growth of supply of capital
Managers wanting to maximise rate of absolute size of the firm, believe that growth of demand for the products is an appropriate indicator of the growth of the firm.
R. Marris has made a significant contribution in the form of
incorporation of the financial policies into the decision
making process of the corporate firm. His theory suggests
that although the managers and the owners have
different goals, it is possible to find a solution which
maximises utility of both. Nonetheless Marris shows that
growth and profits are competing goals. His model
implies that both managers and owners are conscious of
the fact that the firm cannot simultaneously achieve
maximum growth and maximum profits. Marris seems to
be correct in arguing that owners of the corporate firms
do prefer the maximisation of the rate of growth and for
this they do not mind sacrificing some profits.