FAQ: What Is Managerial Entrenchment?

By Indeed Editorial Team

Published November 30, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Organizational leaders responsible for making financial and policy decisions for a company sometimes make choices that benefit their own job security and financial goals. This concept, called managerial entrenchment, happens in large corporations that might have relaxed governance laws. Learning about this concept can help you identify it and prepare for it within your organization. In this article, we discuss some frequently asked questions about managerial entrenchment, like what it is, how it happens and how you can prevent it.

What is managerial entrenchment?

Managerial entrenchment is a concept where a leader at an organization makes company decisions that benefit their personal goals over the company or shareholder goals. This often involves an investment or acquisition decision that provides them with more individual responsibility. With managerial entrenchment, the one manager often positions themselves as irreplaceable in an organization.

What are the effects of managerial entrenchment?

There are several effects that managerial entrenchment can have on an organization:

Capital structure

Capital structure is the combination of debts, equity and other funding an organization uses to operate. If a manager engages in entrenchment, they may acquire additional debts to increase the value of the organization. This can protect companies from external acquisitions, securing a manager's role in a company. Managers might also adjust stock prices for internal and external shareholders, affecting their prices and market status.

Morale

Entrenchment can also affect employee morale. Sometimes, managers who engage in this activity hire other managers or employees that can protect their positions and responsibilities. This could cause employees to seek opportunities at other companies where they might be more likely to develop in their roles. If employees notice entrenchment through financial activities, they might also seek employment at companies with more ethical practices. Strong talent leaving an organization can affect the overall morale of those who choose to stay and might adopt more responsibilities.

Related: How To Improve Employee Morale and Job Satisfaction

Financial performance

As entrenchment often affects share prices and investment decisions, this can also affect financial performance. Often, managers might incur more debt for the company or encourage more shareholder contributions. With this focus on decisions that help a manager's personal job security and financial status, an organization free from entrenchment may have better financial performance with their long-term goals.

How does entrenchment happen?

Entrenchment can happen when there is a disparity between the wants of shareholders and the wants of managers. As board members often communicate what shareholders expect of a company, they often recommend strategies for the future. If management influences the board through ways like influence or personal relationships, they may be more likely to support management decisions over shareholder insights. A company with strong governance controls, like decentralized decision-making and auditing practices, might be more likely to avoid entrenchment with its management teams.

Related: What Is a Shareholder?

How do you prevent managerial entrenchment?

There are several ways an organization might prevent managerial entrenchment:

1. Hire the right managers

Hiring the right managers can help ensure your organization has leadership that supports the overall business goals, values and vision of its shareholders. Consider thoroughly vetting any candidates who might make large financial decisions to understand how they've previously handled situations. You might ask a series of interview questions that ask about how they might handle situations if another manager participates in an entrenchment. It can be helpful to include interviewers from various teams, too, to ensure a wide variety of qualified candidates have interview opportunities rather than only individuals close to leaders from their previous positions or companies.

Related: How To Hire and Recruit Effective Managers in 8 Steps

2. Ensure shared power

Ensuring that multiple people share decision-making power can ensure one individual doesn't make decisions that could benefit them. This concept of decentralization of power can mean a few people involved in the decision-making or larger initiatives where leadership across departments must provide consensus. Some organizations may also request input from employees that aren't in leadership roles to encourage involvement, diverse opinions and equal opportunity.

Related: 7 Benefits of Centralized vs. Decentralized Structures

3. Monitor investment procedures

Monitoring investment procedures may involve audits on how internal and external individuals invest in a company to ensure fair trading. Some companies might consider a co-investment model. This can mandate managers to invest directly in the company. By doing this, managers consider the overall success of the business when making decisions rather than their own personal benefits.

What are some indicators of managerial entrenchment?

There are several signs you might notice that could indicate management entrenchment:

  • Management consolidation: If you notice a consolidation in leadership roles, this might indicate entrenchment. As this occurs when one or a small group of leaders makes business decisions that benefit themselves, a smaller governance body can mean they hope to control decisions.

  • Shifting responsibilities: Similar to changes in leadership size, if managers shift responsibilities, it can be for greater control of a company's financial decisions.

  • Hiring of allies: If a new management team starts to hire allies from their professional network, they might hope to secure their role. Often, managers that hire former employees or colleagues hope to receive favors, which can mean supporting policies that cause entrenchment.

  • Sudden changes: Sudden changes, like unexpected investments or acquisitions, might show that a manager hopes to widen their responsibilities. This can lead to a change in a company's value and increase the personal value of the manager making decisions.

What are common managerial entrenchment strategies?

There are several common entrenchment strategies that managers might employ:

  • Empire building: Empire building is a strategy managers might use that involves acquiring new companies, assets or responsibilities. With entrenchment, this can mean a manager makes choices based on their control and influence rather than on the well-being of a company.

  • Flip-in poison pill: Flip-in poison pill is a strategy companies perform that allows existing shareholders to purchase more stock at a discounted price. This reduces the percentage that individual shareholders own and increases the cost of a company, making it more challenging to acquire by other corporations.

  • Flip-over poison pill: A flip-over poison pill is a strategy that allows shareholders to buy the stock at a discounted price after an acquisition. This can dilute the equity the acquiring company might have in the company they hope to purchase, discouraging the transaction.

  • Golden parachute: Golden parachutes are contracts that organizations write for an executive that include terms and security if they anticipate a takeover. This means an acquiring company might pay substantial pensions, benefits or severance if they hope to replace executives.

  • Amendments: Amendments to decision-making policies is one strategy that a manager might take to maintain control. Some might make it more challenging to debate issues by issuing a large majority to approve changes, ensuring the decisions that benefit them are more likely to remain.

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