Should the primary objective of management be to increase the wealth of shareholders and owners - Essay Example

?Table of Contents Table of Contents Satisfaction 2 Managing Efficiency 3 Public Expectations 4 Profit Generation 5 Management Ethics 6 Management Interference 10 Conclusion 12 Should the Primary Objective of Management be to Increase the Wealth of Shareholders and Owners? Every human activity has its own objective. Unless the objective is clearly defined, application of necessary efforts required to achieve it is not considered a priority. The objects and aims define the necessary efforts required to achieve the objectives. Being a human activity, management is a product of aims and objectives. A business enterprise seeks to maximize profits through serving customers under the control of efficient management. Therefore, the objectives of management are the goals that delineate the definite scope and guide the direction of the efforts to be applied. The objective of management is characterized by four concepts namely goal, scope, definiteness and direction. Managers view objectives as the business values that should be achieved. Therefore, the scope of these values must be well defined, in addition to inclusion of extra goals. Management objectives can be classified as primary, secondary, personal or social. The following paper is a critical debate on the question: Should the primary objective of management be to increase the wealth of shareholders and owners? Focus will be laid on the general objectives of management and the way in which they should be prioritized for maximum benefits. Customer Satisfaction Customer satisfaction is a principle performance estimate in business management (Decker and Learning, 2001). The primary objective of any business management should be focused upon customer satisfaction. This will provide the avenues required for profits that generate wealth of shareholders and owners. The management’s primary objectives should be related to customer satisfaction through the provision of saleable goods and services in the market. These goods should be reliable, have standard quality, competitive, reasonably priced, technologically produced and insufficient in quantity. The secondary objectives are those strategies that assist in achievement of primary objectives. Personal objectives purposes to benefit individuals in a business organization e.g. increasing the wealth of owners and shareholders. Social objectives maximizes the social gain of the community from an organization e.g. the social responsibilities of the organization to the community. Customer satisfaction includes interaction with customers in an ethical environment. Most traditional business strategists view maximization of the shareholder and owner wealth as the fiduciary obligation of business managers (Shaw, 2009: 572). This view is related to the fact that most shareholders invest in the company on the understanding that the management will steer the company on the strategy of generating profits for them. The view was also presented in an era where most capitalist were obligated to manage their own business enterprises. The recent emergence of joint stock companies meant that the managerial control of corporations has technically been divorced from ownership. However, business theorists have failed to establish a mechanism that can harmonize the interests of managers and shareholders to prevent the former from enriching themselves at the expense of the latter. This is has been proven by the recent behavioural trends whereby the managers awards themselves luxurious pay and remuneration packages without any benefits to the shareholders. Managing Efficiency Efficiency is the guiding principle for any successful business. There is no business that has ever risen to top of the industry through slow, outdated and clunky management practices. In the current business environment, the management that only focuses on compliance to stockholder expectations while ignoring inefficiency does not succeed (Morris, Schindehutte and Allen, 2005: 726-735). The imperative issues that should be recognized include cost reduction, improved efficiency, schedule adherence and cycle time adherence. Therefore, the management should realize that there is more to a successful business than the needs of the owners and shareholders. A business is made up of different components that grow and change at different rates. These changes can be utilized for gains through efficient management. Such components include information technology, human resources, and other departments that collaborate under efficient management (Page, 2010). The profits accrued from business operations should first be utilized in improving these components to generate long term benefits to the stockholders. Public Expectations The public expects business management to act in a socially responsible way (Decker and Learning, 2001). The society would be more interested in working with companies that are controlled by the management that places their interests first. The presence of consumer groups and public-interest lawyers have further streamlined the management obligations through frustrating harmful, irresponsible and unethical tendencies that may be portrayed by inefficient business management (Shaw, 2009:573). The management has been forced to be socially responsible, promote diversity, enhance the welfare of their employees, abstain from illegal activities and devise mechanisms of protecting the environment for them to be competitive. Public expectations characterizes the managers’ view as calumny the allegations that their primary objective is to enrich the owners and shareholders. The increased public control in management affairs has made most managers act in ways that are not immediately profitable to the company and sought other strategies that are not geared towards achievement of personal interests (Ciulla, Mart and Solomon, 2007). In response to this, most company management systems have been configured into managerial divisions with distinct agendas and goals. These divisions have been assigned to managers who advocate goals other than profit maximization. They also push the management to live up to its public affirmations of corporate responsibility. Therefore, for the business management to satisfy the public expectations, they should streamline their structure to include experts in social and environmental management. Profit Generation Milton Friedman once argued that the main purpose of a business enterprise is to generate profits. This is because the absence of profits in a business enterprise exposes it to side-tracking and eventual diminishing of its competitive advantage in the market. In addition to the creation of wealth to its stockholders, a high competitive edge increases innovativeness leading to supply of new products, which culminates into economic growth and development (Ahlstrom, 2010:22). Therefore, generation of profits is an eminent role of the management of business enterprises in order to cater for internal growth and increasing the wealth of the stockholders. However, the management should ensure that a business enterprise has a capacity to generate growth through expansion and economic development by enhancing innovativeness. A business enterprise may collapse if the management’s central focus is benefitting the owners and shareholders materially. Short term thinking fixated on profitability can have negative impacts on longer term company strategies. Ensuring longer term revenue growth leads to superior performance and extended value creation as well as profitability. According to Ahlstrom, the resulting long-term growth through innovativeness and ploughing back profit is also crucial to the societies and their economies (15). The management should redirect its attention to improvement of societal living standards by application of redistribution and macroeconomic programs. Innovation provides new products to consumers that are of higher quality and superior standards leading to the establishment of customer loyalty and progressive business growth. Application of management strategies that promote external economic growth leads to a per capita income and improvement in societal living standards (Singh, 2010). This ensures continued business growth and prolonged increase in benefits to its owners and shareholders. Therefore, it is imperative for the management to consider business growth and economic development as the first priority before creating wealth for its owners and shareholders. The internal objective of business management should be developing disruptive innovations geared towards the generation of economic growth. Objectives should also be geared towards production of products that will assist in solving the world diverse problems. Management Ethics Business managers that do not apply business ethics have no prospects for future success. Most business managers have misinterpreted Milton Friedman’s argument that business enterprises exist in a bid to make profit and benefit owners and justified their engagement in unethical, immoral and illegal activities to generate profits (Bejou, 2011:1). However, Friedman’s argument had an assumption in that the business should adhere to the prevailing laws and ethical customs characterizing the industry. The unethical practices applied by the management in creating profits and wealth to the shareholders have led to the prevailing global recession that has economically affected millions of people world wide (Canterbery, 2011). Such effect is an indication that the sole purpose of management is not merely generation of wealth to its owners. Business managers have an obligation of curbing such inconveniences among the society through the creation of opportunities and promoting economic growth. Therefore, the new philosophy of the business should be the establishment of equilibrium between the company’s strategy and the needs of the community. Business Management and the Corporate Social Responsibility The management has an obligation of adhering to corporate social responsibility paradigms that directly impacts on the societal demands. Van Beurden and Gossling (2008) posit that there is a direct correlation between corporate social and overall financial performance of a business enterprise (407). This implies that the promotion of corporate social responsibility leads to improved financial performance. This is because the concept touches on issues related to the modern economy and the consequences on individuals, organizations and communities. Engagement in corporate social responsibility offers answers to the current uncertainties affecting the society as stipulated in the current dynamic, technological and global social contexts. According to Waddock (2004), the pressure for corporate accountability has increased in the recent past leaving business managers with no option other than incorporating social responsibility in business leadership (1–15). The legal restrictions related to corporate social responsibility are also increasing due to business liberalization whereby customers are demanding sustainable products. This has made the management redirect its energy in strategies geared towards customer satisfaction with channelling profits for owners being considered as the last priority. The current trend involves investors focusing much attention on the social responsibilities of a business, in addition to its financial performance. These developments have shifted the attention of corporate fraternity from financial orientation to a more inclusive one. The managers have, therefore, been tasked with the obligation of considering community welfare in their management practices in order to be successful. Some of the eminent factors that managers can consider when linking the business success to the financial performance include industry, research and development, adaptive capability of the business, environmental dynamics and differentiation among others (Van Beurden and Gossling, 2008: 420). According to Crisp (2008), the positive impact of business activities to the community is a product of compassion that emanates from the paradigm of corporate social responsibility. Company managers are said to adhere to corporate social responsibility if they generate legal and ethical profits. However, most business managers hide under the umbrella of corporate social responsibility in a bid to counter the critiques of unfettered profit making. This form of corporate social responsibility lacks compassion and only offers short term benefits which are disastrous in the future development of the company (Ciulla, Martin and Solomon, 2007). Thus, the management has an obligation of incorporating compassion to the business’s vision, mission, goals, culture and decisions to improve the quality of community life. Some of the core values that can be applied in ensuring compassion include adherence to the principles of integrity, consideration towards human rights, promoting freedom and supporting environmental freedom among others. Tension exists between the businesses pursuing profits and the obligation of being ethical (Cosans, 2009:398). Most managers view ethics as a foreign strategy imposed from the outside environments. The idea is related to the diversity of the business leaders that differentiates between a law abiding citizen and an efficient business professional. An efficient business professional would consider the needs of all the business stakeholders, but not just the owners and the shareholders. The analysis of business ethics proves that morality and ethics are interrelated (Craig Smith, 2003: 52-76). Ethics are internal characteristics of an effective management and successful business. The art of business management is different from the other professions in that it does not differentiate between the in-groups and the strangers. For instance, in the political paradigms, members of the in-group are given more attention while strangers may be treated with some degree of hostility. Business management centres on the cooperation of strangers whereby people who do not know each other work together and share business profits. Those managers that only serve the interests of business owners and shareholders cannot establish sustainable successful business enterprises. Managers should understand at least one desire of their potential customers for them to offer suitable goods and services. Understanding the customers’ preferences calls for managers to intermingle and closely monitor their new customers in a bid to align their needs within the business strategies. Any growth in business culminates into hiring different people who work together to ensure reliable execution of responsibilities necessary to ensure customer satisfaction (Decker and Learning, 2001). This may even force the management to use the business financial reserves that were meant to be allocated to the owners depending on the returns the concerned strategy is expected to generate. Therefore, managers are expected to cultivate vibrant business relationships to levels that guarantee tolerance, lack of hostility, respect and corporation among all the business stakeholders (Cosans, 2009:398). The modern involvement of the business management in social welfare has led to benefits such as pre-empting or avoidance of legal sanctions as well as direct and indirect economic efficiencies. For instance, according to Craig, Starbuck’s company has an employee turnover less than a third of the average retail food industry (59). The performance is attributed to the management’s social responsibility practices whereby they offer part-time jobs to the community with full package benefits. The role of business management should not be primarily rooted on enrichment of the stockholders. Husted and Jose De Jesus Salazar (2006), discusses the role of business management characterized by two objectives; profit maximization and social performance (75). The two obligations require managers to indulge in motivational activities that establish a wider customer base for fetching more profits. The management can establish social investment through application of two forms of motivation; altruistic and egoistic. The altruistic motivation is derived from an individual’s consumption of others as well as his or her own consumption. Egoistic is derived from one’s own consumption. Friedman suggests that business managers can never know what social responsibility entails if their only goal is stockholder enrichment (Husted and Jose De Jesus Salazar, 2006: 77). Business managers should maximize the profits margins of a business enterprise without fraud or deception. The business firms whose management is characterized by inefficient management face competitive threat. This is because engagement of the company in undefined primary objectives will make the firm lose market share to the more efficient rival firms (Huggins, 2011). The management is normally made conscious for its wrong choice of objectives through bankruptcy or takeover from a more efficient firm. Therefore, the firm managers should prioritize their objectives strategically rather than respond to the needs of the shareholders without prior streamlining of the business operations. Management Interference The primary objective of any business management is also determined by the mode in which the managers were selected. According to Singh, (2010), performance that goes beyond fraud and deception is related to the purview of freely elected managers who promotes collective approaches of business management. This is because they are under no coercion from electing channels that are normally the owners and shareholders. Otherwise, managers operate under coercive political and social environment that affects prioritization of objectives for efficient business operations. Most business managers assume that profit maximization is a determinant, unequivocal and discernible goal (Shaw, 2009:572). The formulation of strategies by the management does not guarantee that each one of them will automatically lead to the expected benefits. Additionally, predicting the range of profits that different alternatives fetch is difficult. This leads to a difficult future for the management that purposes to enrich the owners and shareholders. Therefore, the management should cater for the needs of all shareholders through balancing all levels objectives levels to ensure long-term profits. The management is supposed to be the monumental professional element of any business. The managers are directly responsible for the conduct and success of the firm as well as other subordinates. The management is obligated with the role of ensuring that all components of a business work in unison through addressing all interests represented by the components. According to Zimmerer and Scarborough (2005), business management serves a pivotal role in bridging all the organs that encompasses a business enterprise. Wilcke (2004) quotes Murray Rothbard as asserting that the management that succeeds on the free market and economic life is most adept in production and extending their services to the fellow country men (189). Those that base their primary objectives on profit maximization for stockholders’ seek favors through unfair means thus penalizing efficiency in production and overall business performance. Therefore, the management that favors conquest and confiscation should be prepared to reckon with the overall inefficiency that such strategies brings about. Conclusion The management is supposed to be the monumental professional element of any business. The objectives of business management are characterized by four concepts namely goal, scope, definiteness and direction. Managers view objectives as the business values that should be achieved. Therefore, the scope of these values must be well defined, in addition to inclusion of one, or more goals. Management objectives can be classified as primary, secondary, personal or social. The primary objective of a business management should be to develop disruptive innovations geared at generating economic growth. They should also be geared towards producing products that will assist in solving the customer diverse problems. The modern involvement of the business management in social welfare has led to benefits such as pre-empting or avoidance of legal sanctions as well as direct and indirect economic efficiencies. The management of a business enterprise should balance and sort out the competing claims emanating from the consumers, employees, suppliers and communities in its area of operation. This implies that the management should prioritize the external environment of a business over internal environment. Any forms of gains experienced by the external environment are derived from the external environment. Enriching owners and shareholders should appear last on the list of management priorities. References Ahlstrom, D. (2010) Innovation and growth: how business contributes to society, Academy of Management, August, pp. 11-24. Bejou, D. 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