Advanced Corporate Strategy

ST104x

Diversifying managerial employment risk

Such unrelated diversification as Prof. Sai spoke about can also be explained using managerial
motives for diversification. When a firm is facing low growth or declining trend in an industry,
apart from the business risk, its managers risk their careers.

Diversification, more so when it is unrelated, provides for managerial mobility across

businesses as well as creates more and more corporate coordination roles, as well as invest
in firm-specific rather than industry-specific skills. Such actions might also contribute to
increasing overall managerial compensation and rewards.

When managers “indulge” in diversification to expand their scope of employment, it might

result in firm growth, but may not necessarily add value to shareholders. Such diversification
reduces managerial employment risk, with no specific performance implications.

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