Owners and Managers
- The Small Businesses - Professional Managers Manage
- People Who Manage
- Professional Managers
- Owners, But Not Managers
- Final Comments
Most small businesses are operated by an owner-manager. The owner is the manager in these firms and vice versa. Where there is more than one owner, one of the owners will manage; at times, as in a true partnership, more than one will. Professional managers, or persons paid to manage, are commonly considered the province of large firms, where Boards of Directors, ostensibly on behalf of shareholders (owners), select someone to run the venture. But rarely recognized is the fact that a surprisingly large number of small businesses are also operated by paid managers. Thus, this issue of the National Small Business Poll addresses Owners and Managers.
The interviews for the surveys in this series begin when a survent reaches the sampled business and asks to speak with the owner. When the “owner” answers the telephone, the survent qualifies the respondent by inquiring about the number of employees in the business, the firm needing between one and 250 to qualify, and follows up requesting the respondent’s position in it. “Which best describes your position in this business? Are you the owner/manager, an owner but not the manager, or the manager but not an owner?” The result of that question leads to
the following discussion.
Eighty-six (86) percent of small businesses are operated by an owner/manager while 14 percent are operated by a manager who is not an owner. More precisely, 83 percent fit the former category and 12 percent the latter with 5 percent of respondents being owners, but not managers (Q#1). But 50 percent of these owners who are not managers report that another owner manages the business while 41 percent report an employee does (Q#19). These owner, but not manager, responses are apportioned among owners and managers, yielding the 85-15 split.
The Small Businesses
Professional Managers Manage
Professional managers are notably more likely to operate larger, small businesses than in smaller ones. Sixty-two (62) percent of owner-managed firms have fewer than five employees compared to just 39 percent among those professionally managed; 9 percent of the former have 20 or more employees compared to 17 percent of the latter (Q#2). Put another way, one in 10 (10%) firms under 10 employees is run by a paid manager; two in 10 (20%) firms with 20 employees or more are run by paid managers. Professional managers are effectively twice as prevalent in larger, small businesses as in smaller ones.
Given the strong tie between employee size of business and the use of professional managers, it follows that owner-managed businesses are much more likely to be found in the home than are professionally-managed firms. Twenty-nine (29) percent of all owner-managed, employing small businesses are located primarily in the home compared to just 9 percent of professionally-managed firms (Q#3). What is not clear is whether the business operates from the owner’s home or the manager’s, though the sequencing and tenor of the questions infers the former. And, as will be demonstrated subsequently, many of these professional managers are involved in family businesses reinforcing the idea that the location of the enterprise is in the home of the owner.
Geography has a modest relationship to the relative presence of owner-managed or professionally-managed small, employing businesses. Regionally, professionallymanaged small businesses appear relatively more common in the Southeast and somewhat less common in the Pacific than elsewhere (Q#4). There is no obvious reason for the phenomenon. Meanwhile, urban/rural differences do not appear (Q#5).
Professionally-managed businesses also are no more common in most industries than owner-managed businesses. For example, 15 percent of all owner-managed businesses are in retail as are 13 percent of all professionally-managed businesses (Q#6). A similar balance appears in manufacturing. But there are notable exceptions. The most striking
appears in the health care and social assistance industries. A stunning 23 percent of all professionally managed businesses are in that industry compared to the industry’s 6 percent share of the population. Just 3 percent of owner-managed businesses are in health care and social assistance. Only in accommodations and/or food services are professional managers more prevalent than the population (9% versus 6%) and then the cause is likely to be size, i.e., the average size of business in this industry tends to be larger in the industry than in others, rather than industry. In contrast, owner-managed firms are likely to appear relatively more often in the construction (10% versus 6%), professional (scientific and technical) services (14% versus 8%) and “other” services, generally personal services, industries (9% versus 4%) than are professionally-managed small businesses. More will be said about the health and social assistance industry when the sex variable is addressed later in the discussion.
On balance, the performance levels of firms seem to modestly favor professionally-managed small businesses. However, given that they also tend to be larger firms, the result is to be expected. The proportion of each with real sales volume growth over the last two years is 47 percent (Q#7), though the professionally-managed have fewer with declining sales (21% versus 26%). A more subjective rating method yields a more favorable evaluation. Forty-nine (49) percent of the professional managers indicate that their ventures are a high performer or a somewhat high performer compared to the competition; just 39 percent of owner-managers view their firms in that manner (Q#8).
People Who Manage
Owner-managers of small, employing businesses average 52 years of age; professionalmanagers of small, employing businesses average 46 years of age, 6 years less (Q#10). The distribution of ages of each appears to be a bell-shaped curve simply centered at a different point group. The outlier here is the owner who is not a manager. They are older, an average of 55, but 15 percent of them are 70 years or more.
Both owner-managers and professional-managers have operated their present business for a reasonably long period of time. The former has operated the business 16 years on average (Q#9). Some percentage of owner-managers started to manage the business before they became owners, though the data set provides no information on the subject. The average length of operation of professional managers in the same business differs little. Their average tenure is 13 years, only three years less than owner-managers. Yet, 35 percent of owner-managers have operated their firms less than 10 years compared to 48 percent of professional managers. An unknown percentage, presumably small, managed the business before the current ownership took over. These data suggest that owners who hire professional managers do so relatively soon after they become owners.
People who manage small, employing businesses either as owners or professionals are well-educated. Four in five have formal education beyond the high school level (Q#11), which given their relatively advanced age (52 years average), means they have obtained significantly more formal education than their chronological peers. Almost one in five (19%) owner-managers has an advanced or professional degree: 12 percent of professional managers do. A large share of these advanced degrees, between 40 percent and 50 percent, either as owner-managers or professional-managers can be found in just two industries, professional, scientific and technical services and health and social assistance. Formal education, therefore, tends to intertwine with the complex industry relationships noted previously.
Perhaps the most striking demographic difference between owner-managers and professional managers is their sex. Seventy-four (74) percent of owner-managers are male and 26 percent female (Q#12). However, a minority of professional managers, 46 percent, are male compared to 54 percent who are female, a 28 point differential from owner managers. A sizeable share of the difference can be attributed to the health care and social assistance industries where
women are almost always the professional managers. But that is far from the sole explanation for the entire difference. Perhaps, these managerial jobs, particularly outside the health industries, are training grounds for a take-over of family enterprises, a subject to which we will return.
The term “professional manager” has been used to this point as a convenient expression to distinguish these people from owner-managers. But they may not be particularly “professional,” though as previously shown they are well-educated as a group and certainly have had adequate tenure to be experienced. However, they may exercise little independence or real authority on their own; they may merely be the owner’s puppet. This issue becomes increasingly of interest as the proportion of owner-managers compared to professional managers appears to have gradually risen as the current recession has evolved. Owners appear to be recapturing their immediate authority as the economy becomes more difficult.
The principal owner of the firm is more often than not absent in the professionallymanaged small business. But, the margin
is small. The principal owner is typically absent in 55 percent of cases compared to 43 percent of cases where he or she is not (Q#14). If the owner is absent, the presumption is that the professional-manager has notable authority over the organization. The remainder are problematic. However, 94 percent of that group report that they manage the business even when the principal owner is present (Q#15). Just 5 percent of the group or 2 percent of the population of professional managers indicate that they relinquish managerial responsibility when the principal owner is present.
One means to confirm formal authority is the manager’s formal title. A title question was inserted into the survey late in the sequent and collected just 77 observations. However, the titles of these self-reported managers generally suggest that
they are not exaggerating their authority. The two most common titles, each shared by about a quarter of professional managers is “General Manager” or “Office Manager”. “Manager” is almost as common. “Administrative Officer” or “CEO” are not common, but present. However, “Administrative Assistant”, “Secretary” and spouse also crept in. Despite the latter aberrations, the titles imply real authority.
If 43 percent are still typically present and 56 percent are typically absent, what are these owners doing? The largest share (55%) work in the business (Q#18). They have not gone anywhere; they have simply surrendered day-to-day operation. However, the number of owners working for the business, but absent from it, exceeds the number typically present. About 18 percent of all professionally-managed firms share this characteristic. These owners apparently spend their time “working from home” or some other place. Perhaps some might be more appropriately categorized as semi-retired or retired. Nineteen (19) percent are already in that category. Another 17 percent work in another business that he or she owns and 6 percent more work for an organization that they do not own.
Professional managers in small businesses are potentially owners-in-training. Perhaps they are a family member the owner is prepping to take-over or perhaps they are a long-time employee who will eventually buy
out the current owner. On this issue, one point is clear – a large proportion of professional managers expect to take over some day. Sixty-one (61) percent think that it is highly likely that some day they will own and operate this business (Q#17). Another 11 percent think it is possible. Thirteen (13) percent consider it is doubtful and another 14 percent consider it is highly unlikely. Thus, managing a small business for another person appears to be a training ground for business ownership. But as will be shown subsequently, the outlook of professional managers may not correspond with the outlook of owners.
About one in four (28%) of professional managers are related to the principal or other owner of the business (Q#16). That is less than half of the number who think it is highly likely that they will own the enterprise some day. In fact, family
member professional managers much less frequently consider it highly likely that they will eventually take over the business (31%) compared to non-family member professional managers (66%). Part of the reason for the lesser plans of family members to succeed is firm size. Family members are much more likely to manage smaller, small businesses (34%) than larger ones (12%), those less likely to have potential for another generation of business owner.
Owners, But Not Managers
It is unlikely that the group of owners, but not managers, interviewed in this series of surveys is a representative sample of the phenomenon, though it is difficult to document. From other data collected in this series (Business Structure), we know that 40 percent of small, employing businesses have more than one owner (exclusive of a spouse) and 13 percent have more than two. However, no comparable data reports how frequently a second or third owner can be found at the business, nor whether a single owner employed a manager, the type of data necessary to determine the representativeness of the figures presented here. The result is that the data are simply a convenience sample of the phenomenon, gathered as a residual from a question on position in the business. Yet, the data are useful if for no other reason than they provide insights into a phenomenon rarely addressed.
Sixty-seven (67) percent of these owners, but not managers, work in the business (Q#23). Another 20 percent are either retired or semi-retired, though they are present at the time to be interviewed. Nine percent work in another business that they own and 4 percent work in an organization that they do not own. Hence, a substantial majority are currently active in the firm, though they do not manage it.
Management responsibilities often fall to another owner. Another owner manages half (50%) of these businesses and an employee (professional manager) does so 41 percent of the time (Q#19). Seven percent indicate the manager is someone else, such as an unpaid spouse. Indeed, family members have a strong presence in this set of businesses. Fifty-nine (59) percent report that the manager is a family member of one or more owners (Q#20). The use of family members to manage these businesses is twice as common in this group of managed firms as in professionally-managed firms generally.
Over 60 percent of professional managers think that it is highly likely that they will own and operate the business some day. They are more likely to think that in larger, small businesses than in smaller ones and they are more likely to think it if they are non-family members than if they are family members. But owners, who are not managers, which also tend to be in larger, small businesses are not nearly as likely to hold that view about the people they have managing their firm. Just 35 percent of owner, non-managers, think it is highly likely that their professional manager will own and operate the venture some day (Q#21). Another 10 percent think that it is likely. But 37 percent call it highly unlikely and another 11 percent call it very doubtful. The data are a mismatch. One group thinks current professional managers will one day own and operate their current firms and the other does not. Though representative of the owner, not manager group is open to question, the results raise questions about the reality of professional manager expectations.
Despite not managing the business, these owners have not abandoned the firm. They claim to be engaged. Ninety-three (93) percent insist that they are personally active in the major decisions affecting the business (Q#22). That implies they have knowledge of the principal decisions, policies, and action in which the venture is engaged. Succession is one of those major decisions about which they would have considerable knowledge.
Though the title of this issue is Owners and Managers, the data and discussion focus on managers, primarily because paid or professional managers, even in small businesses, are not isolated occurrences. They are rather common however, particularly as the size of the smaller enterprise increases. But for their prevalence no statistics of which the author is aware are kept on them; no interest is expressed about them. They are effectively invisible, at least to those outside the firms they operate. But their presence raises several questions, not only about their role in the business, but that of the owner. Most are not simply retirees who have hired someone to replace them until they can either sell the firm or pass it on. The majority still work for the firm, but it is not clear what they do.
The authority managers possess is also an open question. When the principal owner is absent as he is in most professionally- managed firms, the manager is likely to exercise considerable authority and shoulder notable responsibility. But there is no evidence one way or the other that absent owners do not spend the day on the telephone or e-mail giving the managers directions. The age of instant communication looms over any manager who feels separated from the owner. When the owner is present, a different dynamic almost certainly appears. The nature of that dynamic must vary by the personal as well as the business and professional relationships that exist between owner and manager. But it raises additional questions about lines of authority that otherwise would not exist.
The industry where paid managers most commonly exist in smaller businesses is health and social assistance where virtually the same numbers are owner-managed as are professionally-managed; no other industry has remotely the proportion. The industry consists principally of offices of medical care practitioners, medical and diagnostic labs, home health care providers, nursing homes, vocational rehab centers, and child care facilities; hospitals, also in the industry group, rarely are small businesses. But why should this industry lend itself to such a mix of owner and professionally managed smaller ventures? The immediate reaction is that industry professionals find their skills having highest value producing something rather than managing. Yet, how does that differ from professionals who have skills in anything from engineering and law to woodworking? And, why should women play so much greater a managerial role in the health and social assistance industry than in others? Perhaps the industry can help explain the wider phenomenon of owners and managers. The data provided here is only adequate to frame a few questions, not answer them.