Ability to respect the stakeholder’s right to know and the sagacity to reveal only as much as they need to know, signals a true measure of leadership quality.
Every family owned company wanting to professionalize their business operations, will recognize an issue known as the ‘agency problem.’ The promoters, lacking in professional knowledge and experience, would hire professional managers to augment their handicap. Promoters are liable to feel vulnerable because they have to trust the judgement of the experts, known as the ‘agents’ retained by them. It is a leap of faith because they have to rely upon the agent to take decisions and conduct the business on their behalf in the find hope that the agents serve in the best of interests of the promoters, all the time.
The real problems lie in recognizing that the agents, being mere mortals, should be allowed a certain latitude for errors in judgement on the one hand, and yet be watchful that they are not negligent in discharging the responsibilities placed on them.
The potential for an ‘agency problem’ arises out of the demand for performance guarantee demanded by the promoters on the one hand and the levels of performance anxiety suffered by the agents on the other. Further, if the promoters were to control the agents too tightly, it may signal a lack of trust; leniency will invite room for potential grief. How to strike the right balance?
The challenge is primarily two fold: Unity of shared purpose and the appetite for risk needed to deliver to the expectations placed upon the agents. (See http://www.investopedia.com/terms/a/agencytheory.asp).
Striking that right balance consistently and limiting the margin of error in judgement, exemplifies the managerial skills that may persuade the stakeholders to stay invested in the business for much longer.
By nature, both promoters and agents alike, are loss averse and hate nasty surprises. And yet, business being the unpredictable science that it is, is prone to throw up surprises. As long as the frequency of unpleasant surprises and the magnitude of errors are kept down to an avoidable minimum, their relationship would remain cordial, productive and sustainable.
The primary reason for the loss of investor confidence originates from the discovery of deficiencies and irregularities by a third party or a whistle blower, much to the embarrassment of the promoters. A true hallmark of leadership quality lies in having the courage of conviction to declare the bad news beforehand and taking remedial measure to contain the damage.
That calls for taking the stakeholders into confidence and guiding them in advance about what to expect. Successful professional managers signal the bad news to help the investors book the losses. By doing so, they would have safeguarded the confidence of the invested and their own reputation for integrity. Prudent and timely disclosure is an occupational necessity for the promoters stakeholders and the agents alike.