SHAREHOLDERS VERSUS MANAGERS

SHAREHOLDERS VERSUS MANAGERS:

Introduction

The nature of a corporation brings about an apparent discord between management and shareholders or, control and ownership, which is inherent in almost every company.  Each side has its own justifications for their reasoning and neither is prepared to give ground.  An example of this conflict can be seen even at the federal regulatory level and through the disapproval from both sides. From both perspectives these regulations came about due to greed and disgust from managers and shareholders respectively (Heiple, 2007).  According to this shareholder’s perspective, management’s greed pushes them to grant themselves compensation packages and high salaries.  Management justifies this through their self-criteria to own the success of the company.  Furthermore, other researchers found associations between high management compensations and low dividend payments.  High compensations are also associated to a greater stock-repurchasing pattern.  These associations are found together in firms with a relative reduced performance when compared to similar agencies  (Eisdorfer, 2015).  The root for this battle can be found in the goals set for each part and how these are attained.

Goals Conflict

            While both managers and shareholders coincide that profitability of the company is imperative, the means through which this is achieved may vary.  For instance, managers may look to improve profitability through resource acquisition while shareholders may focus on cost cutting strategies (Cornett, 2003).  For example, a manager may need to hire a building renovating company to improve the image of a store because he or she believes that it will improve costumer appeal to the brand or store itself.  A shareholder may look at this reluctantly because it is not a present necessity and deems it a waste of capital use.  While both parties have their reasoning basis for it the lack of consensus may lead to failure of the company to reach the overall goals.

Shareholders look at a company and see it as a machine that makes money.  It is important for them that their investment yields as much returns as possible.   They overlook how these returns are gained and its responsibility lies mostly on management (Chron, 2016).  A way to explore this concept is through risk assessment.  Usually shareholders look for stable and efficient ways to increase their capital while management is focused on performance and it sometimes can rely on taking risks that may be calculated.  This means that managers will focus on anything they can get their hands on to improve performance.  An example of this may be contemplated in companies that focus on asset investment.  In this scenario shareholders look at short and long term gains from the asset performance.  Managers may ignore this idea and bet towards more focused high-risk assets that have apparent higher gains (Cornett, 2003).  Shareholders on the other hand would have diversified the asset profile to ensure profitability in and stability of the overall investment.

Even when profitability attainment paths are different between control and ownership, there are ways through which both can be satisfied.  Although looking for this balance may proof to be hard to achieve it may yield outcomes that will benefit the company while keeping the control and ownership happy.  A way to attain this is to lean up the machinery the company uses to achieve its goals.  This can be focused on the amount of personnel being used or its time management.  High personnel count does not necessarily correlate to high performance.  It is in the interest of management and shareholders to refine the human resources and the amount of time they spend in each task to further improve their outcome yield.  To achieve and control this strategy from both perspectives shareholders may impose budget limits for human resources while management then is responsible for choosing those adequate for the tasks.  Sometimes both cannot be met and a consensus could be reached so that this balance is maintained but the reasoning would need to be justified by both parts (Lewitter, 1970).

There are many ways to improve profitability based on the nature of the market in which the company participates.   Focusing on human resources is one way, but some companies also rely on operations, product development, consumer focus and many others.  Some companies relying of product development, such as pharmaceuticals, car manufacturers, textiles and so on, are constantly looking to improve and renovate their products due to the active nature of their markets.  To gain competitive advantage over their market and therefor improve profitability within, it is important to maintain the cutting edge product outcome to appeal to its costumer base.  Harley-Davidson is a company that manufactures and sells high-end motorcycles.  Their product is a motorcycle with high power and its position in the market is mostly stabilized by their long time reputation almost being a cultural and social staple to its costumer base.  Nonetheless, to maintain this market a good product development is needed.  The means to make this possible is where the conflict between control and ownership stands out.  If this process were seen as one agency, the shareholders would look at it reluctantly because its capital is focused on developing/value-creation and not production of a top-selling item.  The company achieved a balance between both ideals by leaning up this process thoroughly while attaining a stable market growth and profitability rendering it an indispensable agent of the company (Oosterwal, 2010).

Conclusion

Taking a car as being a company whose goals is to get from point A to point B and its passengers are the managers and shareholders.  The mindset of the shareholder is to reach point B as efficiently as possible while for management is to reach it as fast as possible.  Looking at gasoline as the means to reach the goal, it is in the shareholder interest to use as little as possible while the manager usually just sees that there is enough to keep going. Managers and shareholders have each their own ways to manipulate the process.  Managers, since they are the drivers and in control, may decide to accelerate the car to reach the goal faster but the gasoline input control might discourage this.  On the other hand, the inability to reach the goal due to lack of gas may discourage the shareholders intention of controlling the gas input.  In this way the scales are balanced in the overall interest of the company of reaching its goals with good performance, how fast it is reached, based on the resources available, the gasoline.  These different mindsets while they could be beneficial together can also be detrimental to the company.  Each one individually reduces these risks by stipulating its rules for management and shareholders to maintain its own balance and goal attainment.