Interest of Shareholders and Essence of Profit Maximization in Business - Assignment Example

Name Course Name and Code Instructor’s Name Date Financial Accounting The interest of shareholders is paramount when dealing with accounting and financial statements. The essence of preparing any documents dealing with accounts and/or finance is to arrive at the ultimate outcome of either profit or loss at any accounting period (Avis 98). The financial statement for a particular period would provide the basis upon which decisions would be made. It is on this premise that the directors of a company should endeavour to achieve profitable margins in order to realize growth in their entity. Every business enterprise is formed with the sole purpose of making profits and it is this profits that will cater for the welfare of the shareholders at large. However, recent trends dictate that apart from the shareholders interests being paramount it would also be prudent to include other performance indicators to cater for social, ethical and environmental factors. Therefore, this article will strive to bring out the line of agreement with the above enunciation. Interest of Shareholders and essence of Profit Maximization in Business Business entities are formed for venturing into profit making. The shareholders are keen on the profits (Leggatte 85). This has been the practice since time immemorial. According to Milan in dealing with corporate governance, one of the fundamental aspects is to adopt an approach that is integral such that the interest of the shareholders is made known (p. 87). Those at the managerial positions are keen in aspects such as “growth, working capital requirements and internal cash flows, investment opportunities, the record of competitive companies, comfortable industrial relations, market confidence, the company’s public image, environmental issues and other matters beside” (Leggatte 13). When the non-shareholders are brought to light as to benefit from some act, it must be appreciated that the undertaking emanates from the shareholders themselves and so their interest is paramount (McDonnell 66). Therefore, even on matters concerning hostile takeover, what is taken into consideration above all is the ultimate interest of the shareholders in obtaining the highest bid for the shares they hold to the detriment of other parties such as employees (McDonnell 43). Indeed, it is from the high profit margins that the company can resort to increment of wages as well as personal income in form of shares. The increase in profit can be distributed in “stock-related remuneration including stock bonuses, stock options, profit-sharing schemes, dividends and capital gains” (Leggatte 73). Therefore those involved in managerial capacities should in as much strive to facilitate the increase in their remuneration, it would be prudent that the same eagerness should be transformed to reflect the interest of shareholders as enunciated above. In as much the interest of shareholders is seen to be an absolute in practice, some have argued that putting it at the helm of managing a company can pose some challenges in terms of economic tendencies and legal aspects (Hunt 34). Normally apart from the initial capital contribution made to the company, the shareholder economic contribution to the growth repeatedly becomes minimal. According to Hunt shareholders play passive role in that the driving force of the economic growth of the company (p. 103). The practice used in maintaining and spurring growth in any company is by utilizing the profit gained and reinvested the same. Because of this, the economic contribution of the shareholders at this stage becomes minimal save for the initial capital contribution. On the other hand, the entity called a company operates as an artificial legal person and independent from the shareholders therefore enabling it to own property and attain the legal capacity of being able to sue or be sued (Avis 153). These aspects push the role of shareholders to merely of enjoying certain prescribed rights which is normally in the form of voting rights (Hunt 110). With the same token the rights are said to be passive (Hunt 16) in the sense that the actual property belong to a distinct entity. From conceptual point of view in dealing with ownership of companies, it is evidently clear that the ownership ascribed to the shareholders is weaker one. This can be attributed to the pooling together of the vast amount contributed by each individual shareholder (Hunt 104). The foregoing notwithstanding the need to provide assurance as to the aspect of accountability in shareholder value in any risk-return requirements must be addressed with utmost professionalism. This is one of the aspects that claim the interest of the shareholders to be paramount and hence the decisions made are subject to an agreed risk profile. The management is tasked on this basis to provide a forecast sense in managing the shareholder value to be in line with the market predictions (Avis 110). This though has proven overtime to be a difficult task to undertake since not everything comes on a silver platter. Therefore reinstating the confidence of nervous investors takes precedence as was suggested by the board of Alcatel after the fall of its stock market (Hunt 77). Another indication of such consequences was perceived in Carnival (US cruise operator) on February 2000 when shareholders agreed to sell off stock but the price not as expected in that it was bid down forcing to re-strategize and return the cash to the shareholders by buying back the stock (Hunt 51). The interest of the shareholders had to be protected in order to maintain the growth and the image of the company otherwise; any blunder will result in the fall down of companies. This is one of the basis that consideration of shareholders is given priority. Again, the driving force of any company is in the meeting of targets set which implies that the company is making profit. This has long been focus for most companies and the targets are based on expectation of the shareholders and forecast of the management. This however was put into a stringent scrutiny by the sentiments made by Barry Diller, the Chairman of US Networks. In that the commitment to meet the numbers as to satisfy the expectation of the shareholders had little impact in the manner of running the business since such attributes of number simply, distract the focus from the fundamentals of doing business (Hunt 88). With time, development in this field has shown change in perception and some are avoiding or moving away from it as was in the case of James Kilts the Chief executive of Gillette who avoided heeding on performance estimate for the company in June 2001 (Hunt 47). The shareholders in protecting their investment demands that they be assured of the risk and uncertainty with which they are involved in the business. They simply long for things going on swimmingly and they want to obtain greater knowledge of possibility of attaining profit or loss (Hunt 97). This is why financial statement has to be constructed in order to give a feedback of what transpired during the financial/accounting period (Avis 87). However, this position has not found safe grounds as some of the executives have pointed out that there is no need to give every detail of risks involved in the business. Especially when some complexity is involved and that in the long run the act of doing business is entangled in risks and hence including them in financial statements and accounts would be absurd (Hunt 98). Other Performance Indicators Recent developments and trend in Business Empire have changed its course to include other pertinent aspects as alternative indicators other than profit maximization. According to (Solomon) businesses nowadays have changed its direction and give attention to improve value for the employees, the local communities in form of corporate responsibility and the environment as well in the same breath. The same effort that had been put to maximize profits for the benefit of shareholders is now being balanced to include the above-mentioned indicators. It is worth noting on this premise that taking shareholder’s interest into focus must still be the basis since any act of ignoring their need may lead to poor performance and an eventual failure of the business (Solomon 56). However, other indicators must be brought to focus as well such as involving the business in corporate social responsibility as well as in ethical and environmental sustainability. A good example of a company embracing these indicators is the Camelot plc which when viewed in regard with its core business would demand that its image would likely to be appreciated by including a wider scope of indicators other than the shareholders (Solomon 89). The ultimate objective of increasing the wealth of the shareholders must hence be balanced to encompass a wider scope as indicated. It evidently clear that people are now trying to associate themselves or rather invest in companies or businesses that incorporate in their objectives the need to take into perspective matters touching on social, ethical as well as environmental issues (Solomon 47). On this basis it would be prudent to point out at those companies that did not embrace these aspects and have taint their image such as Enron and Parmalat (Solomon 86). Indeed pressure is being mounted on businesses to embrace social responsibility (Mullerat & Brennan 69). Conclusion Base on the above proposition, it is imminent that a move towards profit measures that incorporate full costs mechanism is the way forward for businesses. The tradition of businesses to let the interest of shareholders take precedence over other aspects such as social responsibility and environment concern has been overtaken by events. In the wake of worldwide lobbying for poverty reduction and climate issues, corporations must create some sense in those involved in the running of the businesses to encompass all these factors. Work Cited Avis, Jo. Performance Management: Management Level. London: Elsevier, 2009. Hunt, Ben. The Timid Corporation: Why Business is Terrified of Taking Risk. New York: John Wiley &Sons, 2003. Leggat, W. T. The Evolution of Industrial Systems: The Forking Paths. Taylor & Francis, 1985. Mallin, C. Corporate Governance. Oxford: Oxford University Press, 2007. McDonnell, Brett. Research Handbook on the Economics of Corporate Law. London: Edward Elgar Publishing, 2012. Muhr, S. Ethics and Organization Practice: Questioning the Moral Foundations of Management. London: Edward Elgar Publishing, 2010. Mullerat, R & Brennan, D. Corporate Social Responsibility: The Corporate Governance of the 21st Century. Kluwer: Kluwer Law International, 2010. Solomom, Jill. Corporate Governance and Accountability. New York: John Wiley & Sons, 2007. Read More