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E. Barber: School of Economics and Management, Australian Defence Force Academy, University of New South Wales, Canberra, Australia
G. Manger: School of Economics and Management, Australian Defence Force Academy, University of New South Wales, Canberra, Australia
Introduction
For the purpose of this paper, a small business is defined as a proprietary company, not listed on any recognized stock exchange, whose ordinary shares are closely held. This gives the small company the advantage over a large publicly-listed corporation in that ownership is focused and intense. Directors in small companies are elected at the annual general meeting, as they are in large companies. The problem of managers pursuing their own interests regardless of the interests of the shareholders does not arise in a small business to the same extent as it does in larger corporations. Indeed, as is often the case, the major shareholder in a closely-held corporation is simultaneously playing the role of managing director. The conceptual veil separating ownership and control in effect is absent. The implications of articulating this seemingly innocuous dichotomy between owners and managers comes to the fore when the performance of a small business is assessed. Performance indicators are traditionally measured by the amount of dividends to the owner that the directors see fit to release from the business to give to shareholders, plus any stochastic capital growth in value of the shares. In return, the manager receives a salary package which may or may not be related to the profitability of the company. Obviously, where there is separation of functions between owners and managers, there is potential conflict of interest. By contrast, where the owner is also the manager, this potential source of conflict is avoided.
At the same time as this advantage accrues to the small business, it creates a new problem which is scarcely recognized in the agency literature. The manager-owner combination is a powerful force; and for outside providers of finance it can sometimes be too powerful. Without separation of power, the managerial role dominates the sobering influence of the shareholder. The managerial ego dominates that of traditional accounting control, meaning the manager determines the resource allocation process. Often in the case of small businesses which rely so heavily on human capital, the return on the human...
