MN2177 Block5
MN2177 Block5
MN2177 Block5
Learning Outcomes
By the end of this chapter, and having completed the Essential reading and activities, you should be
able to:
Reading list
Essential reading
Mintzberg, H. ‘The Manager’s Job: Folklore and Fact’, Harvard Business Review, March 1990,
pp.163–176. Browse the online library's A-Z of journals to find this article.
Willman, P. Understanding management: social science foundations. (Oxford: Oxford University
Press, 2014), theme 2: The Agency Problem
Recommended reading
Burchell, S., C. Clubb, A. Hopwood, J. Hughes and J. Nahapiet ‘The roles of accounting in
organizations and society’, Accounting, Organizations and Society 5(1) 1980, pp.5–27. Journal
article, looking at the role that accounting plays in society, and thus highlighting the links between the
construction of accounting numbers and society itself. This is a complex topic, so reading more about
it than is available in this Block is recommended.
Douma and Schreude, Economic Approaches to Organization (Harlow: Pearson, 2017) Chapter 8:
Agency Theory. This chapter is a detailed account of the Agency Problem. The first two sections are
an excellent account of the theory. Later parts of the chapter reveal the economic basis of the theory,
using engaging examples.
Jensen, M.C. and W.H. Meckling The theory of the firm: managerial behaviour, agency costs and
ownership structure, Journal of Financial Economics 3 1976, pp.305–60. Foundational text on agency
theory from the perspective of management.
Kiechel III, Walter. "The Management Century." Harvard Business Review, vol. 90, no. 11, Nov.
2012, pp. 62-75. Excellent, accessible journal article aimed at businesspeople (already on the reading
list once). Recommended again to highlight where Drucker (and by association Mintzberg) sit in the
management developments of the twentieth century. You can access the Harvard Business Review
through the Journal A-Z at the online library, you will need to log into Athens to view the article.
Mackenzie, D. An engine, not a camera: how financial models shape markets. (Cambridge: MIT
Press, 2006) [ISBN 9780262633673]. Chapter 1: Performing Theory? Chapter looking at how the use
of accounting and finance theories and numbers change reality, or reinforce it. (NB: This is a
stretching reading that appears on this list twice: once in Block 5 and another time in Block 11. To
relate it to Block 5, look for sections of the chapter which talk about how numbers and theories don’t
just describe the world, but often change it.)
Works cited
A.V. Bhidé The origin and evolution of new businesses. (Oxford: Oxford University Press, 2000)
[ISBN 9780195131444].
Burchell, S., C. Clubb, A. Hopwood, J. Hughes and J. Nahapiet ‘On the roles of accounting in
organizations and society’, Accounting, Organizations and Society 5(1) 1980, pp.5–27.
Chapman, C.S., D.J. Cooper and P.B. Miller (eds) Accounting, organizations and institutions: essays
in honour of Anthony Hopwood. (Oxford; New York: Oxford University Press, 2009) [ISBN
9780199546350].
Jackson, T. Inside Intel: Andrew Grove and the rise of the world’s most powerful chip company.(New
York, NY: Dutton Books, 1997) [ISBN 9780525941415].
Mackenzie, D. An engine, not a camera: how financial models shape markets. (Cambridge: MIT
Press, 2006) [ISBN 9780262633673].
Rajan, R.C. and L. Zingales ‘Financial dependence and growth’, American Economic Review 88(3)
1998, pp.559–86.
Weetman, P. Financial accounting: an introduction. (Harlow: Pearson, 2013) sixth edition [ISBN
9780273789253].
Zingales L.G. ‘In search of new foundations’, The Journal of Finance 55(4) 2000), pp.1623–53.
5.1 Introduction
What do managers do? is a question which has long concerned theorists and practitioners, who have
taken various approaches to try to explain, or prescribe, what the job of a manager entails. We have
already seen how Taylor prescribed that managers should focus on planning and controlling if they
want to maximise efficiency. We have also explored that the Human Relations School suggested that
managers who wanted optimal performance needed to look after the social and psychological needs of
their workers. These are both very prescriptive approaches, telling managers where their focus should
lie. However, this does not provide a reflection on what managers actually do. This chapter will begin
by addressing this. It will look at two leading descriptive studies, in which Drucker and Mintzberg
respectively have tried to understand the realities of what managers actually do but have arrived at
very different conclusions.
However, the work of Drucker and Mintzberg will just be a starting point, because there are problems
with their research, too. In particular, neither entertains the idea, rooted in economic theory, that
managers might only be concerned with doing any or all of these things if there is something in it for
them. This is known as the Agency Problem, and you have already been introduced to this a little in
Block 1, Block 2, and Block 3. According to economists, the Agency Problem can’t be fully solved,
but some partial solutions will be considered, in particular, how owners might monitor their managers
to check that they are acting in the firm’s best interests. Financial monitoring is regularly used by
companies, but what are some of the problems with that? Can we really trust the figures that we so
often rely on to monitor managers’ behaviour?
Peter Drucker
Drucker (1909 – 2005) was one of the management thinkers to depict management as a distinct
function within organisations. Since the 1950s (and more generally since the late 1930s), he wrote
about management but the work we are interested in here is the 1974 version of his theory of what
managers do (taken from Management: Tasks, responsibilities, practices). In this books, Drucker
defined the manager’s work in terms of five basic functions or operations. He said that a manager:
• Sets objectives
Managers are routinely required to decide what needs to happen in the future and set the goals
to get there, both for themselves and others. This can range from the sorts of large-scale
strategy exercises which make plans years ahead, to more immediate plans for action this
month, this week, or even today.
• Organises
Drucker was thinking about implementation here. He believed that a primary function of a
manager was to make optimum use of the resources required to enable the successful carrying
out of plans.
• Motivates and communicates
This function is very people-focused. Here, a manager will determine what needs to be done
in a situation and then get people to do it using a range of communication and motivation
tools and skills. Drucker said that the manager ‘is uniquely expected to give others the vision
and ability to perform.’
(cf: https://mbsportal.bl.uk/taster/subjareas/busmanhist/mgmtthinkers/drucker.aspx).
Motivation and communication allow the vision to be shared.
• Develops people, including him/herself
Another people-based function, Drucker believed that managers had a responsibility for
learning and development. It is through development that people are given the ability to
perform (referred to above).
• Measures
A manager will need to check progress against plans, taking corrective actions (through the
other functions) where necessary. We will be returning to the idea of measuring and
monitoring later in the chapter.
Drucker’s work was ground-breaking at the time; whilst it may seem common sense today, that is
testament to the way in which his ideas have been absorbed into our way of thinking about
management. We are able to perceive management as a distinct set of tasks carried out under the guise
of management, and we can help to develop the skills and practices necessary to become a good
manager more competently once we have a sense of what managers actually do. Drucker laid the
initial foundations for this. However, it is not without its flaws.
Criticisms
Whilst Drucker’s theory has been very influential, problems have been recognised with it, and with
other similar lists of activities that encompass management. Drucker, and others, make these sorts of
lists, but rarely give clarity or guidance on how long a manager does spend, or should spend, on each
activity. There also isn’t the sort of granular detail which allows us to understand how managerial
roles differ from one another or across a specified time frame, for example as business needs change.
Moreover, and perhaps most importantly for what we are about to look at, Drucker could be accused
of making management look relatively straightforward and full of scientific method, as though it is
possible to exact control over a complicated environment through e.g., planning, measurement, good
leadership and clear communication.
Henry Mintzberg
Mintzberg is another ground-breaking management thinker, very good at challenging the common
assumptions that are made in business. His diversity is astounding, and you will meet him twice more
in this module – once in relation to firm strategy, and once in relation to firm structure. Here, we are
concerned with his 1973 work, ‘The Manager’s Job: Folklore and Fact’, in which he set out to
examine whether the typical lists of tasks of what managers do were, in fact, right. He observed –
albeit a very small set of – managers to see what they typically did at work. His findings stood in
marked contrast to those of Drucker, as we will see below.
Mintzberg said that there were six characteristics of managerial work:
The six characteristics are:
1. The manager's job is a mixture of regular, programmed jobs and unprogrammed tasks.
Mintzberg says that the manager does not just undertake the sorts of organised, planned tasks
that Drucker talks about, but is also concerned with plenty of exceptions to the rule, having to
deal with those as and when they come up, often in ad hoc ways.
2. A manager is both a generalist and a specialist.
A manager will need to have specialist knowledge in their specific field, industry or
discipline, but also general knowledge in order to be able to deal with complex problems. It
may be hard to categorise the necessary skills and knowledge into a simple list of what a
manager does.
3. Managers rely on information from all sources but show a preference for that which is orally
transmitted.
Rather than being the sorts of meticulous planners, measurers and controllers that Drucker
talks about, managers are more likely to make use of oral information. It may be that this has
changed in the information age, and this finding may need revisiting in light of social media,
emails, and so forth. However, Mintzberg’s real point here is that managers do not make as
much use of the sorts of organised, neatly measured data sources as Drucker suggested.
4. Managerial work is made up of activities that are characterised by brevity, variety and
fragmentation.
Mintzberg noticed that managers frequently have to swap from one task to another, to
another. They rarely have the sort of time to be able to sit and measure, plan, or set objectives.
They act rapidly.
5. Management work is more an art than a science and is reliant on intuitive processes and a
feel for what is right.
Again, rather than planning, objective setting and measuring being at the heart of what
managers do, they are often working interpretively, using their instinct and senses to arrive at
what they feel is the right decision, rather than necessarily using data to calculate what might
be the right decision.
6. Management work is becoming more complex.
There was no sense in Drucker’s work that the field of management was changing at all.
However, Mintzberg, writing in 1990, may have observed the growing amount of information
that managers need to deal with and understood that this would have a fundamental impact on
the way that management might be practised in the future. Drucker didn’t recognise that
management might change in the future.
Mintzberg then went on to develop his own list of ten 'roles' that a manager has, but this time (in
comparison to Drucker's) they are based on first-hand observation. He doesn't suggest that all
managers perform all ten, or place the same emphasis on all of them. He also recognises that the roles
they perform at one time or in one situation will differ to what they do at another time and/or in
another situation (although, like Drucker, doesn't quantify this or specify when or how these changes
occur). The roles are discussed in more detail in Mintzberg 1990), one of the Essential readings for
this block, but we are less interested in these here. In many ways, they undermine the power of his
earlier statements that the usual 'laundry lists' of what a manager does are wrong. The real power of
this study is in really examining what managers do and separating the 'Folklore' from the 'Fact'.
Video introduction
This section contains a video on the VLE, you can watch it from the link below:
https://emfss.elearning.london.ac.uk/mod/book/view.php?id=20445
Figure 5.1: The Las Vegas strip by night, by David Vasquez (public domain)
Imagine yourself to be a manager. You have a budget available in your department for staff
entertainment and bonuses. What benefits are you likely to see from paying people a bonus to reward
them for their hard work, versus taking them on an expenses-paid trip to Las Vegas? As the manager,
you would accompany them on the trip to Las Vegas. If you pay them bonuses, you will not receive
any direct benefits. Both options could increase their motivation but the research you have done
suggests that the bonuses might increase motivation slightly higher than the trip to Las Vegas. The
department is split roughly half-half in terms of what they want to do. You really, really want to go to
Vegas. The difference is negligible between the likely impact on performance afterwards between the
two. What do you do?
This is quite a dilemma, and one which Mintzberg and Drucker’s lists don’t appear to recognise.
However, economic theory does, in the form of principal-agent theory.
Key assumptions
The principal–agent model operates with assumptions about behaviour and stylised actors as follows:
1. There are two sets of actors in the firm. Principals are the shareholdersin the firm and agents
are the managers.
They are called ‘actors’ in the model because they are both able to take actions and change
organisational outcomes as a result.
2. Actors aim to maximise their individual utility.
This means that both the principals (shareholders) and agents (managers) are trying to
extract the greatest value from the relationship.
3. The agent acquires information that is not available to the principal and consequently may
act against the interests of the principal.
For example, the manager may know a faster way of processing bills but choose not to tell the
principal because implementing the new system would make more work for the manager.
4. This generates information asymmetries which are the basis of moral hazard.
Information asymmetries are generated because one party knows more than the other party.
Moral hazard is when either party does not act in good faith, bending or breaking the terms
of a contract.
Figure 5.2 Basic idea of agency theory (P: principal, A: agent). (CC BY-SA MisterX000
at Wikimedia Commons)
5. The principal monitors the agent to prevent this.
Monitoring can involve a whole range of different initiatives, including extra layers of
management, regular appraisals, a need for managers to report finances on a regular basis,
phone calls to check that the manager is in the office at a particular time, CCTV on the
factory floor or recording customer service phone calls to make sure that everyone is working
as they should.
6. The purpose of monitoring is to exercise control over the agent by acquiring information
about the agent’s actions.
Monitoring acts as a control mechanism for two major reasons: 1. Principals can punish
agents who act out of turn and 2. Agents will be disinclined to act out in case they are caught.
7. Principals compare the benefits and costs associated with each outcome and are
unconstrained in their ability to compute infinite amounts of information.
The model has to assume (or it doesn’t work) that principals have the ability to compare
every single benefit and every single cost associated with every single monitoring
combination.
8. Principals seek to achieve an optimal solution in which production is maximised.
They can then use all the information to achieve the perfect, optimal solution, where the
agent’s production is maximised. In other words, the benefits of production minus the costs of
monitoring add up to the highest possible amount of any scenario.
Activity 1
Visit a leading news website, such as www.bbc.co.uk/news, www.huffpost.com
or www.newyorktimes.com. Find two articles which discuss issues that could be seen to be a
reflection of the principal-agent problem.
Costs
Agency (managers having the desire and ability to act in their own self-interest) generates costs for
the firm. These costs are the sum of the costs of structuring, bonding and monitoring contracts
between shareholders and managers. The purpose of structuring a contract is to make it clear what is
expected of each party, and what benefits each party can expect from the contract. However, a
contract can never cover every eventuality and thus is always incomplete. Monitoring is concerned
with exercising control over the manager (agent) by acquiring information about the quality of the
agent’s actions, ensuring that they are acting in line with the contract. Monitoring can be very
complicated and expensive.
Here is an example of how complicated the monitoring process regularly is. The principals in a
pension fund are those, normally employers and employees, who make contributions to the fund
which are then invested on their behalf. There are at least three layers of actors whose interests may
conflict with those of principals. First, investment consultants monitor the investment performance of
fund management firms and advise on the selection of fund managers. Second, those fund
management firms invest the pension fund’s assets on a daily basis. Third, the lawyers to the pension
fund advise on the selection of an investment consultant. For the principals, the monitoring costs are
potentially high and, since these agents have different types of expertise, monitoring is difficult.
Principals have to find the level of monitoring that nets the highest returns, taking the costs of
monitoring into account.
example, we can see that accounting does not merely describe pre-existing economic reality, but
rather plays a constitutive or inventive role in the construction of economic reality. Accounting and
finance are seen as a set of practices that evolve over time within a social context (Burchell et al.,
1980). In this case, accounting is thus not a politically neutral practice, but rather reflects sets of
interests in conflict or competition.
Example
A more complex, real-world example may be taken from Mackenzie’s (2006) study of option trading
on the Chicago Board Options Exchange. The trading of options had been hampered by the absence of
an accepted mechanism for options pricing. The Black & Scholes formula was developed, which
eventually provided a rigorous mathematical proof of the value of option contracts. However, initially
the prices of options did not closely match the prices predicted by application of the formula. By
contrast, it was only after the majority adopted the formula that the prices converged on its
predictions. Mackenzie terms this ‘performativity’: adoption of economic theory entails that actors act
in accordance with the precepts of economic models. Following the 1987 market crash, prices
diverged again as ‘put’ options – akin to the purchase of insurance against a fall in an asset’s price –
became more expensive than the formulas predicted.
Implications
The implications of the above for solving the agency problem are clear: if accounting numbers are
socially constructed, and can be manipulated, then there it can be problematic to use them to monitor
the actions of managers (Miller, 1994). Using financial monitoring is just the same as using any other
form of monitoring: no more than a partial solution at best. The Agency Problem remains intractable.
and oversee the workforce without issue. As such, each of these four theories can be seen to expose
the weaknesses of the other three:
• Mintzberg shows Drucker and Taylor to be problematic as they suggest a level of planning
and organisation that is unrealistic.
• Drucker and Taylor show Mintzberg to be entirely focused on what managers do rather than
perhaps what they should do.
• Taylor’s theory shows Drucker to be very broad brush and non-scientific in his prescription of
management activity.
• Taylor may be impressed by Mintzberg’s study of real work, but would no doubt have issue
with the lack of prescription and failure to focus on the need to link performance and
remuneration.
• Mintzberg and Drucker show principal-agent theory to paint a very negative picture of
managers
• Mintzberg and Drucker also show Taylorism to paint a very negative picture of workers, who
common-sense tells us are not always quite so self-serving.
• Principal-agent theory tells us that perhaps Mintzberg, Drucker and Taylor are a little naïve
because they do not pay any attention to the fact that the manager’s aims may be different to
that of the organisation in question and that they may accordingly act in their own self
interests (‘with guile’).
Accordingly, each theory can be used to expose the strengths and weaknesses of each of the others.