Using Baumol's Sales Revenue Maximisation model, outline how shareholder activism might affect any profit constraint - Essay Example

How Shareholder Activism Might Affect Any Profit Constraint Baumols Sales Revenue Maximization model entails when an organization only dwells on the maximization of revenue. The management is more interested in the company`s size rather than making profits since they believe that the size possesses greater monetary value and non-monetary rewards. Sales maximization occurs when a company sells as much as possible without making a loss. This means employing certain strategies such as predatory pricing.

Predatory pricing occurs when a company changes its prices to push their competitors out of business. This is usually very unfair since not all companies can afford to pull off such a stunt and if they did, they would go out of business. The main issue concerning this model is that it discriminates against shareholders. Since shareholders do not make any executive decisions on the running of the company`s affairs, they have to be contented with the decisions made by the management which are not always what they want.

Such blatant abuse of power led to the rise of shareholder activism (.Geetika, 2008, 45). Shareholder activism refers to the ways shareholders influence an organization`s behavior through exercising their ownership rights. Since shareholders do not hold any managerial positions, they tend to be discriminated against because managers are self-absorbed and only care about themselves. Shareholders have found ways of voicing their concerns on the running of the company. They include annual general meetings, where all shareholders converge to discuss the company`s performance during the year.

Dialogue is also another method used by shareholders to engage management in discussions concerning the state of the organization (BUTU, 2013, 17). When companies engage in sales maximization, they tend to be more interested in the short-term goals and ignore the long-term goals. This might not sit well with shareholders who are interested in the company`s future. A shareholder`s main objective, when investing in an organization, is to make profit but sales maximization provides conflict because shareholders want a sustainable flow of profit.

Financial constraints fall in two categories binding and non-binding constraints. Managers tend to favor the non-binding constraint, which maximizes on profit levels. It allows them to line their pockets at the expense of the shareholders (Solomon, 2007, 133). When shareholders feel ignored, they always find ways to get noticed. There are ways to get management listen to them. The internet has helped many shareholders who feel the need for change and voice their concerns. Other forms of activism include publicity campaigns, proxy battles and negotiations with management.

Shareholder`s main job is to keep the management in check. It is their right as part owners to ensure their interests are maintained. They use their numbers to enforce the changes they want. There have been many corporate heads who have lost their jobs during these meetings because they were voted out by errant shareholders. Shareholder diplomacy has been exploited by labor unions who use activism to exert pressure on management for their own selfish gain. Different companies experience different forms of shareholder activism.

For example, a mining company may face environmental activism, a technological company faces social activism. Shareholders are an important part of any organization, their input is valuable, and they spot discrepancies from afar because they are not directly involved in the running of the company’s affairs. Bibliography Butu, M. 2013. Shareholder activism by hedge funds: motivations and markets perceptions of hedge fund. [S.l.], Diplomica. Geetika, Ghosh, P., & Choudhury, P. R. 2008. Managerial economics.

New Delhi, Tata McGraw-Hill Pub. Solomon, J. (2007). Corporate governance and accountability. Chichester, Wiley.