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Need for State’s Withdrawal from Business Management

August 5, 2011

When measuring the efficiency of a company there are used various indicators among which, some do not express the viability and the sustainability of the company. Consequently, there is a risk of keeping some managerial teams that in fact destroy the company every year, reduce the profit (efficiency), lose the main markets. However, it happens that such incompetent or unskilled managers are kept in management positions in the respective companies. Moreover, it happens that the manager is additionally remunerated because he achieves the planned indicators, although the company is falling apart. The explanation resides in the fact that the planning of the pre-established indicators (that are ridiculous and without relevance, instead of considering the profit as indicator) is carried out at the level of the potency of the managerial team and not at the level of the potential of the company, of its assets, of the accessible market, potential that would be better exploited by other manager, a competent manager. For instance, the managers’ incompetence results in the loss of good employees. As a result, the number of the employees in the company decreases, a lower budget of incomes and expenses is planned for the next year according to the reduced number of staff instead of planning the revenue on the assets of the company and of the market related to the company profile. Instead of a planning system with negative feedback, it is used a system with direct feedback that is hostile to the company: the weaker the achieved indicators are, the lower are the values planned for the next period and as a result, the chances for accomplishing these indicators rise, although the managers are incompetent or hostile to the company. This situation is encountered especially in the companies having as main shareholder the State represented by public servants that have nothing in common with the efficiency concepts or business behavior of a market oriented company.

The fact that the State is a bad manager and administrator is systematically proven by the results of the organizations in which the State is involved. According to Milton Friedman, there are four methods to spend money [Milton & Rose Friedman (1998) Liber sa alegi, traducere Petre Mazilu, Editura All, Bucuresti]:

    1. Spend your own money in your own interest.
    2. Spend your own money to the others’ interest.
    3. Spend the others’ money in your own interest.
    4. Spend the others’ money to another’s interests.

The State as a shareholder is represented in the company by persons who are not in the positions (1) or (2). The State is represented in the board and into the assembly of shareholders by persons having nothing to do with the ownership of shares. They have not their own money in there and, as a consequence, their bad impact on the performances could be critical. The representatives of the state, as shareholder, are persons working in the public institutions and, by consequence, their mentalities are totally different from the business oriented attitude. In many cases these persons have no special skill and they are appointed by political criteria.

There is the risk that a skilled manager could be replaced by another one unable to continue the prior performances, although the market rises exponentially. Moreover, there are increased the salaries and other incomes granted to those managers who achieve weaker performances.

What kind of shareholder is the one who keeps, under these circumstances, the managerial team and its representatives in the administration board and in the general assembly of the shareholders? It is even more serious if the majority shareholder is the State, in the name of which this situation is preserved. As a consequence, the losses are supported by the other shareholders and by the tax-payers. This means that the institution that represents the State is ineffective, corrupt, or the connections between the State institutions and the organization, the respective company are abnormal. For any of these situations, to change the institutional framework is urgent. Anyway it is a high urgency to replace these kinds of representatives from the companies and, maybe, the best solution is to replace the state ownership by finalizing the privatization of respective companies. Especially because it is considered historically checked that the private ownership leads to superior performances in comparison with the public ownership, as well as the fact that the notion of propriety is inseparable from the notion of responsibility [Pohoata I., Argumente pentru studiul institutionalismului si reforma institutionala in Romania, Universitatea Al. I. Cuza Iasi.]. The politician is more interested in creating and maintaining the monopoles to the prejudice of the competition. He is rather a predatory whose objective is to plunder the public goods [Buchanan J., Tollison T. (1972). Theory of Public Choice. Political Applications of Economics, The University of Michigan Press].


From → Mgmt & Org

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