Universal versus contextual rationality: a case of Slovenia

2.3High discretion and autonomy of managers

In a survey about the behaviour of the companies in the transition period,²³ top Slovenian managers, when asked about the goal of the company, have as the most important rated principle of ensuring long-term survival of the company. By itself this would maybe not be so important, given the instability and uncertainty of transitional markets. But theoretically correct principle of maximization of share value was rated as second to last (Figure 2). Thus the most important goal of the company in developed (especially anglo-saxon) economies, that is maximisation of the shareholder value, is among the least important principles for Slovenian managers. Could we ascribe it only to their ignorance (bounded rationality) or is there something more substantial (contextual) about it?

Figure 2: Importance of some financial principles for top finance managers

Source: Survey “Behaviour of Slovenian companies and financial institutions in the period of transition”, EF, 1999

In another survey²⁴ managers of 250 Slovenian companies with more than 50 employees were asked about their opinions on principal-agent relationships and more specifically about the suitability of different kinds of owners from their point of view. 59% of the questioned managers feel that owners that acquire the company through purchases on capital market without the consent of the management is not suitable owner of the company. Because owners appoint managers and one of the main functions of the stock markets is to allow anyone with enough money and interest to become an owner, the most appropriate answer would definitely be “It is not my business”. Yet only 11% of the questioned managers had opted for it (Figure 3). Most managers feel that they are foremost loyal to the company and responsible for its well-being and do not feel that they work for the owners of the company (Figure 4). Only 22% has stated that they work primarily for the benefits of the owners. It is interesting to note, that almost as high number of managers, that is 21% of them, feels that they work and are responsible for the well being of the society as a whole. Thus it seems that Slovenian managers have a highly developed sense of social responsibility. They do not acknowledge AIFs, state funds and small shareholders as real owners, because they believe that these groups are often confused in their role of owners (they are not “wilful” owners, they have become owners by the government decree). Thus they are loyal to the company, which is a rather confusing idea, but suitable for the confusing transition times.
Figure 3: Is an outside buyer that has bought the company through the capital market without the consent of the management suitable owner?

Source: GV, 2001

Figure 4: Loyalty of Slovenian managers

Source: GV, 2001

The types of owners that are the most influential in the opinion of managers and the types that they pay the most attention to, are larger Slovenian or foreign owners and AIFs. The least important groups were small shareholders and various government funds. Obviously strong and knowledgeable owners that could interfere with the work of the management are not welcomed by top Slovenian managers, although such owners would certainly be more beneficial to the company than weak or uninterested ones. Only 18% of questioned managers would approve of “strong owners” like AIFs or foreign or domestic strategic partners having substantial power in their company (Figure 5). Most of them or 54%, would rather have state or employees as owners of the company. About one fifth would be most happy with highly diversified ownership structure, where no single owner would have power to question managerial decisions.
Figure 5: Optimal ownership structure as seen by top Slovenian managers

Source: GV, 2001

Judging from the above-mentioned research results, even ten years after the beginning of transition to market economy, Slovenian managers still do not act as their counterparts in developed economies. They openly disregard owners, which are primary stakeholders in the company and consider companies as their own property, which only they could run successfully. Slovenian managers were highly autonomous in the past, and they have managed to preserve their independence and sovereignty in the leadership of the companies even in the new market system (Whitley, Jaklic, Hocevar, 1997). The transition seems to have neither caused gains nor losses in power and influence compared to the old system. Thus the selected model of privatisation, which was supposed to limit the power of managers, has in fact failed. As suggested by Ribnikar, it would be much better if managers were allowed to become the actual owners of the companies.
In a previous system of self-management authority and legitimacy of the managers was rarely questioned. “Peasant workers” were usually content with simple jobs that provided modest but steady income, and that did not require some elaborate organizational or managerial techniques. Since those that did not operate according to the rules of a “fair days work” where usually punished by the local communities within which the factories were located, managers rarely had to exercise power and formal authority within the enterprise which could lead to workers discussion and initiation of political action against them. (Kristensen, Jaklic, 1998). They could even be in favour of increasing rights of participation, co-determination and self-management without jeopardizing their own position. Rather these reforms contributed both to conceal their real power and to influence and to legitimise their surprisingly strong position in the social life of a socialist country.
Until the early seventies the power of managers depended on their relationship with and embeddedness in the network of “old partisans”. Since allocation negotiations, deals, and decision-making were highly informal, the rules and strategies of the game could only be learned through continuous participation. In effect, the longer managers from local enterprises had participated in the game, the better they were able to play it with expertise. Thus, if workers in a local plant used the formal rules of self-management to elect a new manager, they would risk losing a skilful lobbyist capable of safeguarding their interests in exchange for a more popular person who might cause them financial losses. Nevertheless the power of managers was not absolute. Jaklic (1999) indicates three main criteria that were used by workers and the population of individual localities to measure and assess their managers’ performance. First was their ability to generate financial and other resources. Second was their ability to generate jobs and incomes through these resources that could answer the local needs for monetary wages. In the beginning, this ability was primarily measured in terms of quantity. Later, however, jobs and incomes became dependent upon their ability to produce products that could be also sold on western markets by employing technologies imported form the West. Third criteria was their ability to provide their workers with inexpensive loans to finance the building of new houses, stipends for the children of workers, and similar services necessary for the growth and prosperity of the local community. If the comparison with other manager within the same or a neighbouring locality was in disfavour of local managers, workers had the right to and could in fact turn their manager down by evoking the formalities of the Yugoslav self-management system. In effect, as long as they have kept their workers and local community happy, socialistic managers had unquestioned autonomy.
At the end of 70’ as Yugoslavia was becoming more and more dependent on foreign trade and was in need of foreign currency, managers of those companies, that were able to sell their product to the western markets, gained new and undisputed power. As long as they kept exported goods at some “socially acceptable” price level and bringing in a hard currency, their decisions and actions where not questioned. Losses from the sales on the foreign markets were compensated by raising prices on domestic markets, where buying power of domestic consumer and enterprises would simply be raised by printing more money. Gradually, managers and their sales forces learned to allocate surpluses outside their official bookkeeping, thereby accumulating “private” funds of currency in foreign banks or hoarding them at home. With their newly acquired wealth they were able to enhance their status in local community and also significantly contribute to expansion and growth of grey economy as major buyers of moonlighting goods and services and as a major suppliers of valuable foreign currency.
When Slovenia became independent in 1991, one of the major issues was which role managers should play it the privatisation process. The initial proposition of the law followed the already explained Ribnikar’s logic, which was to give managers the power and responsibility. This proposition was based on the assumption that managers already had power, it only needed to be controlled properly.²⁵ Because new political parties wanted to get rid of the old managers which were perceived as “red directors”, that is managers with strong political links to the communist party politicians, and wanted their share of control over the economy, they supported privatisation concept that was supposed to limit the power of managers. Finally the law was a compromise between concepts of a decentralised multitrack and diversified approach with most of initiatives coming form enterprises and massive and speedy privatisation, centrally administered by the Government and based on free distribution of shares to the population. However, this kind of privatisation gave a lot of discretion to top managers, allowing them to form different coalitions in order to retain control. At the end of privatisation process the outcome for majority of the companies was that 60% of the shares was in the hands of internal owners and 40% in the hands of external owners. Whereas in USA shares are predominately in hands of individual owners and in Great Britain institutional investors have a prevailing influence, in Slovenia shares are primarily in hands of internal owners and AIFs. Although it was expected that uninterested individual shareholders, that is mainly workers, would gradually sell of their shares to the “real” owners (so called “second round of privatisation”), managers have managed to rettain this dispersed ownership structure, where small internal owners control around 60% of the shares (Giacomelli, 1998).
Therefore it seems that the same old game between local communities, workers and managers was being played under different set of rules. Managers have managed to retain their power and autonomy by preventing strong external owners to take control in the firms.²⁶ Although workers participation in decision-making process was formally reduced, they have effectively managed to retain important negotiating power towards managers, since they acted in dual role of employees and owners. There is always a chance that unsatisfied workers could sell their shares thus enabling hostile takeovers. Ten years after the beginning of the transition, Slovenian managers still do not behave as scientists, consultants or their counterparts from the developed economies would expect them to behave. They do not pursue the “right” goal of the company, manipulate ownership structure of their companies, view external owners with hostility, maintain strong links with the local community and are reluctant to undergo any investments or changes that could jeopardise their position within the company or within the society. But viewed from the contextual perspective they are by no means irrational. Because of specific historical circumstances, institutions and customs, as well as limited information and deliberating capabilities, they act as any other manager would act in this situation. They act rationally. Whether their actions are good for the economy as a whole is not their concern, they leave it to politicians to figure it out and steer the socio-economic development in the right direction. But in order for the latter to do so, they must firstly truly understand why former behave the way they do.
In short, behaviour of Slovenian managers can be holistically explained, allowing for boundedness and contextuality of rationality. Firstly, their power and autonomy originates from the previous system and they have managed to keep it almost intact, as any selfishly rational person would do. Secondly, undeveloped capital markets, low liquidity of shares and unpredictable investors who rely more on information about the moves of foreign buyers or major capital players like central bank or government than on financial data about the performance of the companies (Mramor, 2000, pg. 391), make it almost impossible for shares to reflect the true value of the company. They are either underrated or overrated, do not react on signals from the company and can not be reliable base for allocation of capital and motivation of managers. Thirdly, AIFs, which are one of the most influential and powerful institutional owners of companies, are not acting as responsible owners. Since their shareholders have got their shares for free, and the values of their shares are very low because of the “privatisation gap”, they do not strive for maximisation of value of their portfolio, but prefer maximising cash flows that would enable them to cover their extraordinary high operating costs and commissions of managing companies. Thus they exercise high pressure on managers for higher dividends and are not overly concerned about the value of the shares in their portfolio. Fourthly, internal owners, which are usually the largest group of shareholders, do not evaluate their managers on the basis of increases of share value. Since they can benefit from the company in many different and subtler ways, they do not demand that managers follow the principle of maximisation of share value.