Managerial opportunism involves the use of internal company information for the personal benefit of one or more managers. For public companies, managers exercise this opportunism when they choose to sell shares they received as part of their compensation when they perceive the market's value of the company as higher than their estimate of its value. For private companies, managers may diversify the business or grow revenues at the expense of profitability to protect their jobs and increase their salaries.

Definition

Managerial opportunism involves a manager exploiting opportunities in his own self-interest. It may or may not involve deceit, but it does include a proclivity towards self-interest evidenced by certain behaviors. Managerial opportunism is one symptom of the agency-principal problem with managers as agents and owners as principals. With the agency-principal problem, managers act in their best interest and not in the best interests of the owners.

Shareholder Wealth

The primary aim of a for-profit business is to maximize the wealth of its owners. Companies provide wealth to their owners through the distribution of profits the business generates and via the increase in business value through profit retention and effective management. Managerial opportunism interferes with this aim because it prevents small business owners from maximizing their wealth.

Avoidance

Owners typically cannot determine in advance which managers they hire will act in their own self interest. Therefore, to reduce the risk of managerial opportunism or avoid it entirely, owners must put governance and control procedures and policies in place. Owners may also evaluate managers' performance on a periodic basis to help ensure that managers' goals align with those of the owners. In a corporation, the board of directors has a fiduciary responsibility to monitor management's actions. For small corporations run by professional managers whose shareholders act as passive investors, the board plays a crucial monitoring role.

Scenarios

When managers receive increases in total compensation as the businesses they manage grow, they may push for an increase in company size and an expansion of the product and service line at the expense of profitability. The larger size generates more revenues and more profits in absolute terms but not in percentage terms. Managers may also push for product or business diversification. The diversification reduces the managers' risk of job loss but also may reduce the return on equity and return on investment for the owners.

Example

A general manager may help grow a company from $5 million to $8 million in revenues and, in doing so, increase profits from $1 million to $1.2 million. Due to the increase in company size, the general manager's salary increases from $100,000 to $150,000. However, at $5 million in revenues, the profit margin was 20 percent but at $8 million the profit margin dropped to 15 percent. The manager benefits much more than the owners.