Question

Do you believe that ethical managers are unaffected by the managerial motives to diversify discussed in chapter 7?

Answer 1

The primary duty of a manager is to increase the value of the business. The managerial motives come in reducing the risk of doing so in that the risk of managerial tasks (and the related consequences such as loss of job) reduce. This leads to too much diversification and reduction of the value-creating ability of the firm. Diversification, on one side, reduces the risk of failure and secures the job of the manager, and on the other side, increase their compensation almost linearly because of the growth of firm size (due to various activities of diversification such as M&A, Joint Ventures and so on).

An ethical manager, under an ideal situation, will primarily focus on the value-creating activities of the firm keeping aside the self-interest of securing the job or growing self-wealth. However, this does not mean that the manager will not make decisions in favor of diversification in that there can be value-creating diversification strategies s well. Value-creating diversification strategies are those which enable realizing economies of scale/ scope, gaining market power, or developing financial economies. Such diversification strategies will simultaneously fulfill the motives of the managers of securing a job and raising the pay in that these are going to lead competitive advantages.