Value minimization would probably be the most commonly cited business goal, but this is not the only thing to create. Business and service organizations exist to create valued goods and services that people need or desire. In this piece of writing first, would look if maximizing the value of stock conflicts with other goals of the organization. Second, I will examine how it effects the value minimization on different subjects like customer and employee safety, the environment and the general good of society.
Last, I will illustrate some specific scenarios with my answer. According to James (2005) Management’s goal should be to maximize shareholder wealth, which can be translated maximizing the value of the stock. In a detailed sentence “maximizing the value of the stock,” means maximizing the true long run value of the firm. Commonly, good managers understand the importance of ethics, and they recognize that maximizing long-run value is consistent with being socially responsible.
On the other hand, some businesses may focus on maximizing shareholders value and controlling operating costs and never compromise the other goals such as employee safety (Kowalski, 2014). . In stakeholders theory, managers must make decisions so as to take account of the interest of all stakeholders in a firm such as employees and customers. This theory may advocates the refuse of how to make the necessary tradeoff among competing interest and leaves managers with a theory that makes it impossible for them to make purposeful decisions (Jensen, 2000).
Many corporate leaders and financial forecasters would agree that long-term shareholder value is generated by constantly providing value to customers and employees in an economically profitable manner. Employees and customer value governance is a strategy to reach this corporate importance. It ensures growth is both profitable and capital efficient while building reliable indicators of future performance (Frazier McCullough, 2005). According to Dominant (2013) Maximizing stock value is not incompatible with meeting customers and employee needs because employees are the stockholders in many firms.
Firms that maximize the stock value are generally legally can afford to treat employees well. At the side of customers, maximizing firm value does not mean that customers are not critical to success. In many businesses keeping customer happy is the rout to stock value minimization. Maximizing value does not mean that a firm has to be illegal and social outlaw. 1. 4 GENERAL GOODNESS OF SOCIETY According to Britton and Yachters (2013) found that Shareholder value minimization is broadly associated with social welfare minimization.
Those who make the relationship tend to go on to state that management agency costs are extreme and that increased shareholder power would reduce the costs. Reduced agency costs by definition enhance shareholder value, which in turn is assumed to imply social welfare enhancement. Britton and Yachters (2013) also found that the shareholder interest, as the outstanding right on corporate wealth, is straight aligned with society’s interest in maximizing corporate-and therefore societal-wealth, and so the shareholder interest succeeds for political attentiveness.
In current years, the mission for political attentiveness has made the jump from theory to practice: a “shareholder class” is said to have risen in our political economy as a side-shoot of the growth of stock ownership among the middle class. Therefore, real-world shareholders again are seen to bear on social welfare. In a same concept, according to Dolmen, stubble and Laborers (2013) value minimization within a company can result to social welfare minimization. Social welfare is created when a firm produces outputs that are valued by its customers at more than is the value of inputs for their production.
As long as the firm is capable of selling its OUtpUts at higher market price than is the cost of its inputs, it should increase the supply of inputs for production of outputs. In an opposite statement, Argon (2005) argues that many executives were out-of-touch on ethical issues when they maximize the firm value; either they were too busy or because they sought to avoid responsibility. 1. 5 CONCLUSION (THE ANSWER) In conclusion, an argument can be made either way. It can be yes because when it comes to maximize the value of stock in market economy everything is priced and there are some illegal and ethical behaviors.
On the other hand, it can be no because the bottom line is that the goal of any company should be to maximize shareholder value within legal limits. Many firms spend more money attempting to prove how they reflect all of the stakeholders and not just the shareholders but most would not do this unless it paid for them to do so. For example, firm pays 3 million USED to protect the environment and in return the firm gets 2. 5 million profits and this creates a dilemma in the firm’s decision making process. QUESTION TWO Corporate ownership varies around the world.
Historically, individuals owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions and other companies own most of the stocks in public corporations. Do you think the agency problems are more likely to be more or less severe in Germany and Japan than in the united states? 2. 0 ANSWER . 1 INTRODUCTION The corporate form of organization and its ownership has many differences around the world. The strict laws and regulations differ from country to country.
In this part of discussion I will examine the severity of agency problem by comparing corporations owned by individual shareholders in the United States with those corporations owned by institutions, such as banks and financial institutions in Germany and Japan. 2. 2 CORPORATE OWNERSHIP Shareholders are the owners of corporation and, as such, their claim on organizational resources is often considered superior to the claims of other inside stakeholders. These shareholders can be individuals or they can be institutions. The role of shareholders in corporations is to invest money in it by buying the organization’s stocks or shares.
Shareholders invest their money by expecting return and this return is not something guaranteed. Due this, there many shareholders relaying on institutional investment to protect their interests and to increase their collective power of control the activities of the organization (Dolmen, stubble &LaporSek, 2013). In the corporate form of ownership, the shareholders are the owners of the company. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist.
Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm (Dolmen et al 2013). In USA, there is huge number of shareholders who owns the corporations. Larger corporations have many thousands or even millions of stockholders. For example, AT&T has about 2. 2 million stockholders and about 1. 6 billion shares outstanding. In such cases, ownership can change incessantly without touching the continuity of the Firm. (Jordan, Westfield & Ross, 2008).
In other countries such as, Germany, Japan and Canada relaying on institutional investment to protect their interests and to increase their collective power of control the activities of the organization (Dolmen, stubble &LaporEek, 2013). Institutional investors carefully monitor and evaluate the financial performance and governance practices of the firms whose shares they own. Dolmen et al (2013) argued that institutional investors uses a lot of attention Because of the size of their investments in many public companies and because of the negative influence they’d have on these share prices if they sold them unexpectedly.
If they have a worry, they are more likely to be able to meet with company directors and managers to discuss the issue and possible resolutions. 2. 3 AGENCY PROBLEM Jordan, et al (2008) defined the agency problem the possibility of conflict of interest between the stockholders and management of a company. Agency theory proposes a valuable way of understanding the complex authority legislations between top management and the board of directors. An agency relation arises whenever the principal envoys decision making authority or control over resources to the agent.
The issue of diverse shareholders makes very difficult to judge the effectiveness of top management team action. This diverse of numbers and ideas may create different goals and interests. On the other hand, the issue of institutionalizing and integrating ideas efforts may create different atmosphere of delegation, negotiation and understanding between principle and agent which in turn reduces the agency problem. The verity of agency problem increases wherever, the number of shareholders increases and the divergent ideas and objectives emerge. . 4 CONCLUSION (THE ANSWER) In conclusion, the agency problem is less severe in other countries, such as Germany and Japan when compared to the United States of America. This is because the relative number of individual shareholders or owners. Fewer numbers of owners reduces the diverse firm goals and opinions. As the case of the other countries the higher the institutional ownership may leads higher degree of understanding and agreement between principles and agents when t comes to make decisions about the risk projects.
Furthermore institutions use more effective governance mechanism to control the whole activity rather than the individual shareholders. This is another advantage of using institutions to invest corporations which indicates more internal of control and effective decision making. Generally the agency problem is more serious when more individual ownership exists in the corporations Majority corporations in United states of American owned by individuals and this creates diverse ideas from different areas.
This divergent ideas mean the possibility of agency problem o occur more than in any other country which uses the opposite institutional investors or owners in the world. The fewer number of institutions that owns corporation causes to less decision making and encourage mare understanding between the owners and agents. QUESTION THREE In recent years, large financial institutions such as mutual funds and pension funds have become the dominant owners of stock in United States, and these institutions are becoming active in corporate affairs. What are the implications of this trend to agency problems and corporate control? . 0 ANSWERS 3. 1 INTRODUCTION Generally, the way that stakeholders can influence corporations is through their investment decisions. Now days financial institutions engaged the corporation affairs in order to increased transparency and accountability. In this portion of writing I will examine the implications of this new trend to agency problem and corporate control. 3. 2 THE EMERGENCE OF INSTITUTIONAL INVESTORS Actually important investment movement is the growing attentiveness of corporate stock held by institutional investors including mutual funds and pension plans.
In the early 1 sass individuals owned about 75% of corporate stock n the United States. By 2000, institutions owned about 60% of the stock in 1 ,OHO, largest U. S. Corporations. 49, the increase in institutional ownership provides an opportunity for organized and effective result in substances of corporate governance. While institutional influence on corporations has been, so far, mainly used to endorse the interests of shareholders, the influence of institutional owners continues to increase and could be used to promote the interests of other stakeholders as well (Roach, 2007).
Davis (2012) analyzed that the growth in institutional investment and the intense rise of mutual funds, which have become the leading owners of corporate America through their control of pension savings. Then he found the rise of institutional ownership and the ideology of shareholder value changed the way corporations are organized, and precisely the spread of new models of ownership. 3. 3 THE IMPLICATIONS OF INSTITUTIONAL INVESTORS ON AGENCY PROBLEM In the last, ten years most developed countries have experienced a dramatic increase in institutional ownership of publicly listed companies.
For example, today In UK only 10% of all public equity is held by individual shareholders. Furthermore, many financial institutions have entered the scene and have become important owners alongside the more traditional institutional investors, such as pension funds and investment funds (Isakson, 2014). According to Anderson and Mare (2005) One of the criticisms of the shareholder model of the corporation is the implied assumption that the conflicts are between strong, rooted managers and weak, dispersed shareholders.
This resulted to a nearly private attention, in both the logical work and in reform efforts, of determining the observing and management entrenchment problems which are the main corporate governance problems n the principal-agent context with discrete ownership. The role of institutional investors has become prominent in many countries, the results of many institutional corporations moving away from defined individual investor corporation to institutional investor’s corporations. This increased of delegation of investment has created the need for good corporate governance.
Many financial institutions such as hedge funds, asset management companies and institutional investors are involved in the investment process. This increases the degree of asymmetric information and agency problems and makes corporate provenance at each step between the firm and its final investor even more important (Cleanness &Yurtoglu, 2012). According to Beechen and Fried (2005) managers would tend to have more and agency problem more severe when 1. There are fewer institutional shareholders 2. The board is relatively weak or ineffectual 3.
There is no large outside shareholder 4. Managers are protected by antipoverty arrangements. The first point in above sentences indicates that the implications of institutional investors are clear. The larger the institutional investors in a country mean the fewer of agency problems. The agency problems become more critical and when the conflicts of interest is between managers and dispersed shareholders, but institutional investors provide more integrated systems of understanding and co-coherence. While insider systems generally have large block holders who exercise control over management. In the latter case, therefore, the main conflict of interest is between controlling block holders and weak minority shareholders. 3. 4 THE IMPLICATIONS OF INSTITUTIONAL INVESTORS ON CORPORATE CONTROL The increasing percentage of institutional investors in most corporations in US and UK in the last forty years increased the role of good governance and corporate control. The higher the institutional investors are the higher the goodness of corporate governance and corporate control.
The increased observing by institutional investors is seen as a development in the way corporate governance is exercised in the US and I-J, since this is addressing one of the major weaknesses of outsider systems. (Anderson & Mare, 2005). 3. 5 In my conclusion, the increasing the institutional ownership in Unites States of America and the emergence large organizational group activism results he reduction of agency problem and creates effective corporate control. The increase of financial institutions that control public owned companies leads increase level of corporate control and it reduces the agency problem.
The higher the institutional investors are the higher the goodness of corporate governance and corporate control. The larger the institutional investors in a country mean the fewer of agency problems. The agency problems become more critical and when the conflicts of interest is between managers and dispersed shareholders, but institutional investors provide more integrated systems of understanding ND co-coherence. QUESTION FOUR Discuss why is the goal of financial management to maximize the current share price of the company’s stock? In others words, why isn’t the goal to maximize the future share price? . 0 ANSWERS 4. 1 INTRODUCTION The financial management goal is to maximize the current price of company s stock. The goal of maximizing the value of the stock avoids the problems associated with the different goals of firm. So the question is why financial managers maximize the current price not the future price of the stock. By explaining this scenario will explain the reason for maximizing the current price f a stock. 4. 2 THE GOAL OF FINANCIAL MANAGEMENT Supposing that we constrained ourselves to for profit companies, the goal of financial management is to make money or add value for the owners.
This objective is a little unclear, of course, so we study some different methods of expressing it to come up with a more accurate meaning. Such a meaning is significant because it hints to an objective basis for making and assessing financial decisions Road, et al 2008). The objective of maximizing profits may state to some kind of “long-run” or “average” profits, but it’s still uncertain precisely what this means. Most corporations today would have but one correct purpose: maximizing their shareholders’ wealth as measured by stock price.
Other objectives such as serving customers, building great products, providing good job are regarded as legitimate business ends only to the extent they increase shareholder value (Stout, 2012). Management’s goal must be to make movements intended to maximize the firm’s intrinsic value, not its current market price. Note, however, that maximizing the intrinsic value will maximize the average price over the long run but not necessarily the current price at each point in time (James, 2005). Many industrial organizational theories are created on a rather unsophisticated premise that a firm’s first priority is to maximize profits.
In practice, thus, firm managers driven by equity-based inducement packages are more apt to emphasis equally on multiple objectives, including profitability, stability of profits, and creating conditions to foster strong anticipated growth of profits. When viewed through the objective of equity market valuation, different market outcomes, interpretations, and policy-relevant factors begin to emerge (Wang & Stinger, 2007). The goal of maximizing profits ay refer to some sort of “long-run” or “average” profits, but it’s unclear exactly what this means.
First, we can say something like accounting net income or earnings per share As we will see, these numbers may have little to do with what is good or bad for the firm. Second, we can say by the long run because current price is the reflection of future price. According to Jensen (2005), value minimization goal is more than just creation of a firm value. Only value minimization does not improve energy and eagerness of staffs and directors to create value; it helps only as a criterion for assessing the firm’s performance.
Therefore, the value minimization as a business goal has to be reinforced with the dream of a firm, strategy and tactics, which pull all firm’s driving forces (i. E. , managers and workers) in their eagerness for domination at the competitive market. 4. 3 CONCLUSION Maximizing the current share price is the same as maximizing the future share price at any future period. The value of a share of stock depends on all of the future cash flows of company. Another way to look at this is that, barring large cash payments to shareholders, the expected price of the stock must be higher n the future than it is today.
The goal of management should be to maximize the share price for the current shareholders. If management trusts that it can recover the profitability of the firm so that the share price will increase Thus , if the current management cannot increase the value of the firm, then management is not acting in the interests of the shareholders by fighting the offer. Since current managers often lose their jobs when the corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situations.
The goal of financial management is to maximize the rent share price of the company’s stock because the minimization is a Behavior that tries to maximize such performance measures as revenue, profits, contribution margin, or expected net present value. The concept of maximizing shareholder wealth is a goal that encompasses everything that is expected out of a management. We know that the shareholders wealth increases either by dividends or by increase in value of shares. When company share value increases is when the company earns more profit and its net income or revenue increases.
