Shareholders
A business is comprised of small parts that make t whole. In addition to these parts are the shareholders and the stakeholders. A stakeholder is a person or an organization that is interested in an organization’s activities. A stakeholder can affect or be affected by the events of the organization. At other times, they can both change and be affected by the business’s activities. They vary from the government to investors, political groups, the suppliers, the customers, employees, and the community. Stakeholders range from internal stakeholders to external stakeholders of a business. Internal stakeholders consist of those parties that are directly involved with the company like the employees, investors and business owners. External Stakeholders are parties who do not work directly with the business, but are affected by the actions taken by the industry; they include the suppliers, public groups and the government. A shareholder is an individual or a corporation that owns stock or shares in a company may it be public or private. The shareholders play a significant role in ensuring the selection of the board of directors in a company as they are the ones who make the votes. This essay looks at the pressure put in firms that have caused them to change their behavior to ensure they have maximized shareholders value. The discussion also discusses the impacts of shareholder value maximization has on stakeholders.
Over the years, there has been a debate on the shareholders and how they are making business hard for the executives. The pressure put on the board members and the managers to produce short term results and maximize the value of the shareholders. This is an excellent paradox as these results can destroy the long term value of the shareholders if they force the executives to cut on the production costs, expansions in emerging markets and spending in the expense of making a lot of profits. The shareholder value is led by the principle that a company should consider the interests of the shareholders as well as their interests before the cooperation makes any decision that is set be it short term or long term and should also be involved in making the strategies of a company.
There has been a lot of complaints from the executives in companies that the meddling and the second-guessing of the shareholders have been making work very difficult for them. This significant challenge now started in the 1970s. This is the year when the power in cooperation’s started changing and moved to the direction of the shareholders. This was after a long period in which managers were the people calling the shots. The shift of power to shareholders was caused by economic and political causes and also due to the rise of the philosophy of shareholders ‘dominance that was as a result of academic research on the motivations and behavior of corporate managers. According to the shareholders’ philosophy, the shareholders are at the center of the universe of the cooperate world: while the managers the board members orbit around the shareholders.
Legally, the shareholders do not own cooperation. They, however, hold the securities that enable them to have less claim on the earnings of the collaboration. They own the stock, which is a form of company security. Besides, the shareholders do not have the final say on big cooperate decisions, as this is the work of the board. Being owners of the stock, the rights of the shareholders are limited. For instance, the shareholders do not have the right to hold control over the assets of the company. In addition to this, the shareholders are also not allowed to take any earnings from the company and can only do so when they receive a dividend from the cooperation through the authorization of the board. The shareholders affect the operations of a business and also their decisions. Their effect is more different compared to that of the stakeholders.
The primary objective of the shareholders is to maximize the profit of the cooperation. Companies who therefore have shareholders have the primary aim of increasing the benefits. Companies, therefore, try to balance between meeting the goals of the shareholders and that of the stakeholders. Profitability aspect in any company is essential since it helps in the attraction and retention of stockholders in cooperation. The shareholder’s objective of making profits has however proven to be a challenge. The executives in partnerships are under pressure to maximize the returns of the investors. The quick decision to make money has led to hasty conclusions, backfired divestitures and poor strategic planning.
Moreover, shareholders are compensated based on the price performance of short term prices rather than long term feasibility. This compensation structure is a great challenge for management interests and the shareholder’s decisions. The shareholders are therefore pressuring the management in firms to make short-term decisions that result in profitability and not long term objectives that benefit the firm. This means that the shareholder’s obsession with making profits fist can interfere and is interfering with the innovation and strategic proceedings of cooperation in favor of immediate gratification of profits.
The shareholders are the people in the company who elect the board of directors who in turn appoint the leading management in cooperation. This is inclusive of the CEO and the president of a firm. The stakeholders can put pressure on the board to change the managerial team of a firm and to elect those of their choice. This is because the shareholders have control over the board since they are the ones who voted them in. This is a challenge to management who do not adhere to the opinions, decisions, and requests of the stakeholders; Shareholders can be brutal and selfish. They want instant gratification with the objectives of the firm. Therefore, if a manager does not do things according to the way of the shareholders, then they are at risk of losing their job. Executives in firms are therefore in the high pressure of doing as the stakeholders suggest and at the same time, ensuring that it is of benefit to the firm. There is no teamwork between the managers and the stakeholders, making the work of the managers hard every single day. A firm has to, therefore, work under pressure of sustaining its goals and ethics and at the same time satisfying the shareholders.
Shareholders have contributed to the conflict between the company and society. This happens when the company works in benefit of its interests and forgets about those of society. The principle of maximizing on the profits like explained above can be used as a justification in deceiving customers about products, polluting the environment primarily as industries try to produce more than they can and evading taxes to maximize profits. Incan also leads to the violation of the suppliers to get more products at a low price and treating staff as commodities by overworking them and paying them low wages. The management may be able to see this conflict but are not in any position to do anything, since they’re under the board, which is controlled by the stakeholders. Therefore, firms now careless of the customer’s satisfaction as they try to satisfy their stakeholders. Firms have become money oriented and do not care about the safety of their stakeholders.
Effects on Stakeholders
Maximizing the shareholders’ value can have led to poor business practices. This is attributed to the fact that business can engage in illegal and unethical practices to ensure that they gain maximum profits. For instance, a firm can indulge in falsifying their financial information to boost its shareholder value. Also, the firms can start treating their staff bad by overworking them with low wages to boost their finances, which in term boosts the shareholders’ value. Furthermore, squeezing of the suppliers to supply more for less and lying to their customers about the products so that they can buy more to gain more profits are some of the unethical practices that firms engage their stakeholders to improve shareholder value.
The customer is the primary stakeholder in a firm. However, cooperation’s tend to forget the wants of the customers or the firm might do things that are not optimal for the customer for them to make maximum profits. For instance, a firm may consider cutting on the cost of production by using low quality raw materials. This action might boost the benefits and the price of the products but is a low standard for the customer. The long term of this action is a bad reputation for the firm and its products causing an adverse effect of the intended effect. Shareholders may caus3e an excellent development for a firm through short term objectives, but it causes damage to the stakeholders in long term effects.
Shareholder value maximization can be the leading cause of hurting the employees, who are stakeholders. The lower the costs of cooperation, the more profits it makes, which is the goal of the shareholders. Therefore, by cutting the benefits and wages of employees, the company can make a lot of profit. If domestic labor is expensive, then a firm can outsource the work to foreign workers who are willing to work at a low wage. This makes the staff expendable, which is a downside for the employees in companies with shareholders. The shareholders will always look at alternatives that help with the maximization of their profits. Therefore, cutting off employees for cheap labor will not be a big deal for them.
The business decisions of a firm affect the job security of the employees. If a company makes risks that affect the company, then the job security of the stakeholders is compromised. The conflict with society is an excellent example of how the decisions of the shareholders can be a significant threat to the safety of the stakeholders; the employees and the suppliers. The community in general shifts their interests if they realize that the objectives of the company will bring harm in the future. Therefore, if the goals of a company are short time, as the shareholders want them to be, then their long term security is affected.
Consumer satisfaction goes in line with the decisions of the firm. The culture that is created by a firm has a significant effect on the stakeholders and their perspective on their role in the organization. Shareholders are slowly interfering with the culture of the firms; it ensures that they profit themselves. For instance, the perception of a business is to work with the society to ensure profits. The shareholders however now use the community to make profits, which makes the culture of the firm die and create a lousy relationship with the society.
In conclusion, shareholders value has resulted in being a challenge for many executives. Some perceive it as one full of risks, conflicts, and tradeoffs. A firm should, therefore, concentrate on ensuring that they can obtain shareholders value and at the same time, observe the interests of their stakeholders. There is a lot of pressure that has changed the behavior of the firms due to shareholder value. Shareholder value has changed the action of the firms by making them selfish, as the companies only think of themselves and how to make more profits rather than concentrating on their stakeholders. It has also contributed to fear of the managerial team in their jobs. In addition to this, shareholder value has impacted the stakeholders in a negative aspect like job insecurity, engagement of the firm in doing poor practices, forgetting the customers and messing with the business culture. Shareholders are significant people in a business who should be respected; at the same time, they should also be considerate of the stakeholders. Shareholders and stakeholders are part of a firm, and the two should operate with the benefit of each in mind.