Marris’ model of managerial enterprise:
The model developed by Marris deals with a firm where there is separation of ownership and management. The utility of the managers (M) and owners (O) are given by
UM = UM (salaries, power, status, job security) and
UO = UO = (profits, capital output, market share, public esteem) respectively.
Marris argues that most of the variables appearing in the above functions are strongly correlated with a single variable, the size of the firm. Among the various measures of size, some are - capital, output, revenue and market share. Marris limits his model to situations of steady rate of growth over time during which most of the relevant economic variables change simultaneously. Therefore, 'Maximising the long-run (LR) growth rate of any indicator can reasonably be assumed equivalent to maximising the LR growth rate of most others' (Marris, 'A model of the managerial enterprise'). In other words, we can pick up any one of the indicators to serve our purpose. Hence the utility function of owners
Marris argues that managers prefer to maximise the rate of growth of the firm instead of maximising the absolute size of the firm. This argument also seems empirically true. Otherwise, managers would prefer to move from smaller to bigger firms. In reality they prefer to be promoted within the same growing organisation, rather than move to a new one where the working environment
might not be favourable. Keeping this in mind, Marris implicitly assumes that salaries, status and power of managers are strongly correlated with the growth of demand for the products of the firm. Therefore, the managerial utility function may be written
as,
Marris suggests that 's' can be measured by a weighted average of three crucial financial ratios, viz.,
Too low a liquid ratio increases the risk of insolvency and bankruptcy. Similarly, too high of it makes the firm attractive to take-over raids. Therefore, managers need to choose an optimum liquid ratio.
Once again, the firm has to choose an optimum leverage ratio because debts are important from the point of view of functioning of the firm and also too high a debt is not good an indicator of good health of the firm.
It may be noted that πR is the most important source of finance for the growth of capital. It cannot be too high, otherwise distributed profit may be less, thereby not satisfying the share-holders, which in turn may result in fall of price of shares, and renders it attractive to take-over raiders.
Marris combines the above mentioned three financial ratios into a single parameter a , 'the financial security constraint'. See that a is a weighted average of a1, a2 and a3, with the weights depending on the subjective decisions of the managers. Marris postulates that a is negatively related to a1, positively to a2 and a3.
He further assumes that there is a negative relation between job security (s) and financial constraint a. If a increases by reducing a1 or increasing a2 or, a3, firm becomes more vulnerable to bankruptcy and/or take-over raids and consequently the job-security of managers is reduced. A high value of a implies managers are risk-takers while its low value indicates manages are risk-avoiders.