In a Private Limited Company, the shareholders are the owners and directors are the managers. However, not all directors’ own shares, nor it is workable for every shareholder to run the company. Hence delegation of work among members and owners is important. So the directors are appointed to manage the company.
At the time of incorporation of the company, it is easier to own and manage the company. But later, the owners need the help of experts to manage the company.
Key points to be considered about separation of management from ownership
Correct Usage of Resources
A company may have resources in hand but owners do not know how to deploy them, leading to wastage. For optimum resource utilization, the company would require a person who can plan, guide and deploy resources to get maximum returns, thereby avoiding loss.
A company needs professional managers with skills and knowledge, since a single person cannot have all the skills of different operational requirements. These professionals will help the company grow and diversify.
Often, there is a lack of communication between owners and employees. So a company needs a mediator who bridges the gap. Managers can play a crucial role in presenting the views of owners to employees and vice-versa. Owners have very ambiguous ideas for the company and managers interpret it in a simple manner for the employees to execute.
The company can grow faster when specific roles are assigned to persons according to their ability. At regular intervals, the managers evaluate the performance of the company. It helps to find out the areas where there is a need for development. Such research can be possible only by the person who is involved in the day to day management of the company. Hence owners/shareholders are not the proper persons to play this role as they are not involved in the day to day management.
For the growth of the business, it is very important to take the decisions which are favorable to the company and not to an individual. Hence operational decisions must be taken by the managers or directors rather than the shareholders. The decision of shareholder may be in personal interest and not in the company’s interest. It results in profits only for the shareholders and not to the company. Hence an unbiased decision is very important for the company.
The liability of shareholders is up to their unpaid share capital. They are not liable for any wrong decisions taken by the company. The managers or directors are liable for any such decisions which are not viable for the company. Hence the owners or shareholders can safeguard themselves from the penalties levied for such wrong actions.
Another advantage of separation of management and owners of the company is that the directors can take some decisions without the approval of shareholders. This helps the company to take quick decisions. Otherwise, for every decision, a company has to call for shareholder’s meeting and approve the decision. Hence it will be a lengthy procedure and not viable for day to day management decisions.
The appointment of skilled managers and directors will incur a cost to the company. Hence separating the owners and managers can be expensive at an initial stage. But at the same time, it is an important decision for the company’s growth.
The separation of roles will help to grow the company and diversify its business in non-core areas also. The owners can enjoy their ownership with voting in key decisions of the company. While skilled managers will help a company to carry on complicated business in a smooth manner.