Company directors and managers goal of maximising profits - Essay Example

Company directors’ and managers’ goal of maximising profits The essay sheds light on the need of directors and managers to focus on the objective of maximizing returns for their shareholders to whom they are primarily accountable and should use all the available resources to post the highest probable return. The essay also considers the various ethical and social responsibilities of those charged with governance to the society along with the shareholders. Introduction J. L. Thompson (2004) states that a company as a going concern does not survive alone or live in a vacuum; it needs directions from the managers and directors to discover a path which is related to the mission of the organization and the objectives set by it. Managers and the directors set objectives which they struggle to attain of which the main objectives are earning profit, adding to wealth of shareholders, growth and customer satisfaction etc. Directors, at times, are more concerned with growth of the company and addition to the wealth of the shareholders while meeting the expectations of the shareholders with considerable profits as they are the ones owning the business. However, in doing so, the directors and managers have also to consider their ethical and social responsibilities while looking after expectations and requirements of the shareholders simultaneously. Responsibility to Maximize profit The prime responsibility with which the directors are entrusted is to maximize the profits for the shareholders of the company who are the actual owners of the company and to them the directors are accountable to. The directors have to make efforts to make decisions in order to contribute to the profits of the company as the shareholders. Since the directors of the company are the representatives of the shareholders and act on behalf of the shareholders, the onus lies on them to keep the interest of the shareholders in mind to the add to the wealth of the shareholders who have invested in the company for the same. The key purpose of the board of directors along with the managers is to make sure the prosperity of the company through jointly handle the affairs of the company, at the same time meeting the suitable welfare of its stakeholders especially the shareholders. (Group, 2011) ACCOUNTABILITY OF DIRECTORS and Managers Klaus J. Hopt (n. d.) mentioned in his research that “Being responsible for the going concern of the company the directors hold themselves liable and accountable to the shareholders and aim at maximizing their returns, where the law also directs them the same.” (Hopt) The financial goals and requirements of the company and their directors are mainly aimed at satisfying their major shareholders who are the actual stakeholders in the company, the actions and inactions of whom may have a negative effect on the company. These actions may cause the directors to go beyond their usual limits to give the shareholders the desired return. Influence of the shareholders For reasons, such as the influence and pressure of the shareholders, the responsibility and accountability to shareholder may be exploited and misused. Listed companies are more directly related to the shareholders as their shares are quoted in the stock market as well as the price of the share is linked with the profits and therefore the persistent continuity of the company signifies that the company’s objectives constantly meet the anticipation of the shareholders. Therefore, the pressure and persuasion of shareholders can have a severe impact on the management of the company. To this degree, some of the listed companies at times look for short-range returns to satisfy their major shareholders which may even include exploitation of the accounting techniques as well as window dressing which is the art of showing the profits of the company as very attractive where they actually aren’t. Examples of some of the biggest corporate frauds such as WorldCom and Enron have resulted where the directors have looked to enhance the earning capacity of the company by exploitation. Regulations and Fear of Dismissal The laws governing the companies and the directors are made-up in such as manner as they lay stress on the directors as well as the shareholders of the company to readily look after the return of the shareholders and the fear of dismissal in directors that if they don’t yield enough return which the shareholders are aiming at, forces them to look beyond their social responsibility. Ethical and social Responsibility of Directors The traditional duty of the directors and the managers is to maximize the utility of the directors and the standard by which the behavior of the directors is judged is their attitude towards profitability but the difference in the modern approach is that to the shareholders they no longer owe the loyalty but to the public. Possibly the main and foremost non financial purpose of each organization is to make sure that its continued existence has to do with its social responsibility that to the public as well as the environment as a whole. Social responsibilities are policies, approaches and actions which can be taken into account as the broad and greatest welfare of society generally as well as the environment as a group. Whereas some of the countries make the issue of social responsibility as a governmental issue which is governed by regulations and laws which usually are willful procedures in some countries. There can be several ways of taking care of and fulfilling the social responsibility of the company and the entity as a whole, which includes the responsibility of looking after the interests of the public as well as the shareholders. Charitable work and resolute work for the promotion of business, commerce and making the availability of jobs in the community as well as the industry in which the company carries out its business can aid the society in a good way. (Thompson A. A., 2006) Other major responsibilities of the management include the safety and protection of the environment which are deemed to be the major value additions to the company. Kotler (2003) mentions that an organization needs to be very customer-oriented rather than being product-oriented as customers are major assets of the company and can be deemed to be the lifeblood of the company. In the modern era, the companies have to put into practice the quality management agenda if they intend to keep themselves in the black and profitable. (Kotler, 2003) Conclusion Friedman (n.d.) states that it is a widely accepted fact that in the capability as a director or the manager, he works as the agent of the persons who are owners of the business or have founded the organization and their key responsibility is towards them. The directors are entrusted with the responsibility to maximize the wealth of the shareholders and to yield the desired return, but this shall not overshadow the accountability towards the several ethical and social responsibilities which are usually referred as the “Corporate Social Responsibilities” towards the environment and the society as a whole. The managers and the directors alike have to look after the interest of the shareholders while adhering to their responsibility towards the society and not just look to maximize the profits and returns but to be accountable to all the other stakeholders who have a role to play such as the customers, employees and other stakeholders around them. Bibliography Friedman, M. The Social Responsibility of Business. New York Times Magazine . Group, B., 2011. Responsibilities of directors and boards . [online] Available at [Accessed April 22, 2011] Hopt, K. J., Corporate Governance and Directors Liabilities. European University Institute. Kotler, P., 2003. Marketing Management. Prentice hall publication. Thompson, A. A., 2006. Strategy-Winning in the Marketplace: McGraw-Hill. Thompson, J. L., 2004. Strategic Management. Read More