Williamson’s Managerial Discretionary Theory:

The theory of Managerial Utility Maximization was developed separately by Berle-Means-Galbralth

and Williamson. It is also known as Managerial Discretion Theory. The Theory is based on the
concept that shareholders or owners of the firm and managers are (two separate groups. The owners
or the shareholders want high dividends and are. therefore, interested in maximizing profits, the
managers, on the other hand, have different motives other than profit maximization. Once the
managers have achieved a level of profit that will pay satisfactory dividends to shareholders and still
ensure growth.

they are free to increase their own emoluments and also the size of their staff and expenditure on
them. In the words of Williamson, "7b the extent that the pressure from the capital market and
competition in the product market is imperfect, the manager, therefore, has discretion to pursue goals
other than profits." Further Berle and Means suggested that "The lack of corporate democracy
league's owners or shareholders with little or no power to change corporation policy."

According to Williamson, "Managerial Utility function may be expressed as follows:

U = f (S, M. ID)

It will be read: Managerial utility is a function (f) of additional expenditure on staff, managerial
emoluments and discretionary investment.

(Here, U = managerial utility; S = additional expenditure on staff; M = managerial emoluments and

ID = discretionary investment).

Managerial utility function maximizes the utility of the managers rather than profits of the firm. The
manager is expected to follow policies which maximize the following components of his utility
function.

I. Expansion of Staff: The manager will like to increase the quality and number of staff reporting to
him. This will lead to an increase in the salary of the staff. More staff are valued because they lead to
the manager getting more salary, more prestige and more security.

ii. Increase in Managerial Emoluments: Managerial Utility also depends on managerial emoluments.
It includes facilities like entertainment allowance, luxurious office, staff car, company phone, etc.
Expenditure of this nature reflects to a large extent the prestige, power and status of the manager.

iii. Discretionary Power of Investment: Managerial utility also depends on the discretion of the
manager to undertake investment beyond those required for normal operations. The manager is in a
position to invest in advanced technology and modem plants. Such investments may or may not be
economically efficient. These investments may be undertaken for the self-satisfaction of the manager.
According to the theory, in a firm, shareholders and managers are two separate groups. The firm tries
to get maximum returns on investment and get maximum profit, whereas managers try to maximize
profit in their satisfying function.

At last, Williamson’s managerial discretion theory shows the utility function of a manager. In this
theory, the firm will try to get maximum returns or maximum profit where as manager try to
maximum utility satisfying function. They are in equilibrium when the utility has maximum amount.

Baumol's Theory of Sales Revenue Maximisation

Prof. Baumol, in his book 'Business behavior, Value and Growth' has propounded a theory of Sales
Maximization. Main aim of a firm is to maximize sales. By sales he meant total revenue earned by the sale
of goods. That is why this goal is also referred to as Sales Maximization Goal. According to this theory,
once profits reach acceptable levels, the goal of the firms become maximization of sales revenue rather
than maximization of profits.

In the words of Baumoul, 'The sales maximization goal says that managers of firms seek to maximize their
sales revenue subject to the constraint of earning a satisfactory profits. "

The above definition maintains that when the profits of firms reach a level considered satisfactory by the
shareholders then the efforts of the managers are directed to maximize revenue by promoting sales instead
of maximizing profit. While studying this theory. K must be kept in view that firms do not Ignore profit
altogether. They do aspire to attain a general level of profit. But once an acceptable level of profit is
obtained their goal shifts to sales maximization in place of profit maximization.

Baumol raised serious questions on the validity of profit maximization as an objective of the firm. He
stressed that in competitive markets, firms would rather aim at maximizing revenue, through maximization
of sales. According to him, sales volumes, and not profit volumes, determine market leadership in
competition. He further stressed that in large organizations, management is separate from owners. Hence
there would always be a dichotomy of managers' goals and owners' goals. Manager's salary and other
benefits are largely linked with sales volumes, rather than profits.

Baumol hypothesized that managers often attach their personal prestige to the company's revenue or sales;
therefore they would rather attempt to maximize the firm's total revenue, instead of profits. Moreover, sales
volumes are better indicator of firm's position in the market, and growing sales strengthen the competitive
spirit of the firm. Since operations of the firm are in the hands of managers, and managers' performance is
measured in terms of achieving sales targets, therefore it follows that management is more interested in
maximizing sales, with a constraint of minimum profit. Hence the objective is not to maximize profit, but
to maximize sales revenue, along with which, firms need to maintain a minimum level of profit to keep
shareholder satisfied. This minimum level of profit is regarded as the profit constraint.
However, empirical evidence to support above arguments of Baumol is not sufficient to draw any definite
conclusion. Whatever research has been done is based on inadequate data; hence the results are
inconclusive.

Arguments in favour of Maximisation of Sales Goal

Following arguments are given in favour of maximisation of sales goal:

i. More Realistic: Goal of maximization of sales is a more realistic goal- In fact, firms accord more
importance to the goal of sales maximization than profit maximization. It is so because success of a firm
is generally judged from its total sales. According to Ferguson and Krupps, 'Among the various alternatives
advanced, Baumoul’s thesis has great advantage — it raises the other models in the direction of reality and
plausibility while still permitting a rather general theoretical analysis."

ii. More Practical: Revenue maximization thesis of Baumol is more practical. It is so because goal of
revenue (Sales) maximization leads to more production which, in turn, leads to fall in price. As a result,
consumers' welfare is promoted. They also endorse this goal of the firms.

iii. More Availability of Loans: At the time of sanctioning loan to a firm, financial institutions mainly
consider its sales. Prospects of loans are bright for such firms as have large total sales.

iv. Strong Position in the Market: Maximum sales of a firm symbolize its strong position in the market.
Sales of a firm will be large only in that situation when consumers like its production, firm has more
competitive power and has been expanding. All these features are indicative of the progress of the firm.

v. More Advantageous to the Managers: It is more to the advantage of the managers that the firm should
aim at sates maximization. This way their credibility enhances in the market. Maximum sales is a reflection
of the competence of the managers It has a favorable effect on their wages. Firm is in a position to offer
higher wages to the employees. Consequently, employer-employee relations become more cordial. II is the
constant endeavor of the managers to maximize the sales of the firm after attaining a given level of profit.