Maximizing of Shareholder Value for Corporations - Coursework Example

MAXIMIZING OF SHAREHOLDER VALUE FOR CORPORATIONS Maximizing of Shareholder Value for Corporations Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 28, 11, 2010 Maximizing of Shareholder Value for Corporations A corporation is a formal business publicly registered and having its own privileges and liabilities different from its members. It is an organization that has a lot of operations and structures laid down for it to function in the field it operates in. This form of organization usually has an organizational structure that is set in a manner that allows it to achieve its organizational goals in the best and cheapest way possible. It has a management that co-ordinates all the other functions within the organization and allows it to function as expected. Usually, corporations are owned by the government, the public or even by groups of investors (Burns 2001) In most cases, the ownership of corporations is limited to the initial initiators or investors. This leads to a few people being involved in the overall ownership and running of the organization. This situation has forced most of the corporations to remain stagnant and not to thrive well in their field of trade especially since they lose their competitive advantage to the private sector which thrives very well. This is usually the case since the corporations experience a lot of problems that force them into a situation that is very disadvantageous since their costs of running increase even as their financial stability and economic base remains weak. There is therefore a need for there to be established laws and incentives that allow shareholders to be a part of the ownership of the corporations and the aim should be maximization of the shareholders so as to allow the organizations to have a stronger financial base as well as increased sources of funding. This may result to the betterment of the corporations leading to an increased competitive advantage which leads to an increase in market share and consequently increased returns foe the organization. This not only benefits the organization and its shareholders but also has very many benefits to the whole society (Penrose 1959). Corporations are more complex than other firms or businesses because they incur more costs through administration fees, taxes and legal requirements. So generally they are for larger companies with very many employees. This is one disadvantage of corporations. Also, corporations must be formed under the law in which they are registered making it hard and difficult to start a corporation. The process of starting the operations of a corporation starts with establishing a business name, then selecting a corporate type, determining company directors and their positions which have to be written within the articles of incorporation and bylaws and obtaining a certificate of incorporation from the local state which moreover has to be completed by a lawyer and finally filling it with a registered agent. This whole process does take time and a lot of resources (Alvarez & Busenitz 2001). However, there are many different forms of corporations in which most of them are used in transacting or doing business, where business is referred to as a legally recognized organization designed to offer good or services to consumers in exchange of money. In corporations, there are minimum liabilities since employees are not in any case held liable in case of any shortcomings in the firm. This results to protection of the shareholders’ personal assets. The liabilities fall hand on the corporation or the company. Only the shareholders stand to loose their investment incase the corporation fails, employees will only loose their jobs but will not be liable for any debts that remain owing from creditors to the corporation (Bosch, Huse & Senneseth 1999). “Shareholders can only be held responsible for their investment in stock of the company” (Penrose 1959, p. 47).One of the advantages of corporations over small businesses or firms to employees is that its shareholders are always responsible for their share of the investment in the organization. This attracts more potential shareholders hence increasing the amount each one of them wants or willing to invest in the corporation (Covin & Slevin 1989). Another advantage of corporations is the ability of raising funds or capital for their businesses. This is usually done through the selling of the shares by a shareholder. The general public can buy the company shares on stock exchange thus raising funds whenever the company needs to increase the capital. In addition, corporations are able to get better and more qualified staff or employees because they offer more competitive benefits for partial ownership through stock options. The shareholders also have chances of enjoying the assets and structures of the corporation even after they are dead. This allows stability and increase in capital through long-time investments in a company. They however have disadvantages over small companies and firms. First, their processes and management is always more costly and time-consuming compared to other organizations. So for any corporation to start, a lot of finances and time is required. This finances and time may be limited in other cases. Further more, corporations are recognized by the law to have rights and responsibilities, just like people. By so doing, some exercise human rights violations against individuals or state. These incidences are mostly experienced in big corporations which are supported by government or international organizations. They can be sued under the act of law. However, they can also be convicted of criminal offences such as fraud or even manslaughter. In other incidences, corporations are taxed twice as much as other firms. This happens when the corporations are taxed when they make profit and again when dividends are paid to shareholders. This leads to increase in loses of company profit and through over-charging in taxing. Sadly these incidences are inevitable in corporations (Penrose 1959). Moreover, increased paper work due to regulatory procedure of federal and local agencies on the corporations overburdens record keeping, making the work tedious and time consuming. There are different types of business under corporations. These include the legal, personality, limited liability, transferable shares and centralized management under a board structure. Corporations should be left free to maximize shareholder value in order to pursue economic profitability which is a major value of any company. However, most companies claim that they are not in business just for the profits but that is entirely not true, because companies that work hard to earn big profits ends up increasing social welfare. On the contrary, where social welfare and profits are in opposition, appealing for corporate social responsibility will almost be ineffective since in most cases, the executives are likely not to work in the public interest but to the interest of the shareholders. So, by maximizing the shareholders value, corporations are more likely to make more profits hence more economic profitability leading to increased salaries to both the shareholders and the employees. Allowing corporations to maximize shareholder value also increases the social responsibilities of both the shareholders and the society at large. This is possible where businesses make ethical decisions which restrict harmful social acts or activities that directly affect social goals. But most corporations do that to secure their businesses altogether. Corporations however operate as networks of people working together. So, in order to motivate people to work hard for the interest of the company, trust should be built with them by maximizing their shareholder values. Likewise, it is important that the organization gain a lot of trust from the external environment. This environment consists of the organization’s customers, suppliers and interested groups. This can be done by ensuring that all individuals feel comfortable with the running of the corporation and the way their interests are taken into account. Most of corporations are said to be closely held, meaning that there are no ready market for trading of shares. With this, there are advantages over publicly traded companies because small closely held company can rapidly make changes than a public traded company. So it’s more dynamic an can grow faster .they can also take a hit to profit with minimal repercussions. Social responsibility has costs. This creates barriers to entry to corporations and big businesses making it tough for new competitors .in addition to limited influence of shareholders on corporations, they can be controlled by creditors such as banks by demanding a controlling interest analogous to that of a member upon to boards decisions on matters to dissolve a profit corporation, shareholders receive the leftovers following and others with interest in the corporation. The responsibility of the shareholders is therefore determined by the amount of their contribution. There is only one social responsibility of businesses, to use resources and get involved in activities that will increase its profits in regard to free and open competition without fraud (Burns 2001). In corporations however, there are strengths of shareholders that are either dismissed or ignored. So there are limitations associated to the available resources for the organizations. Due to the challenges facing the shareholders in the big firms, they should create small businesses and become less independent of the big firms for income. In this aspect, therefore, there are a lot of benefits that are realized by an organization whenever it maximizes its shareholder value since this result to increased sources of funding and capital and consequently an increase in the organization’s competitive advantage, a factor that has been known to increase revenues for the organization and has a lot of benefits for both the organization and its shareholders as well as the whole society at large. There is therefore a need for all corporations to establish strategies that will allow them to increase their shareholder value as well as attract more shareholders into their ownership so as to give way for the progress of the corporations, a factor that will lead to increased benefits for the shareholders and the society (Covin & Slevin 1989). References Alvarez, S & Busenitz, L 2001, ‘The Entrepreneurship of Resource-Based Theory’, Journal of Management, vol. 27, no.6, pp. 755-775. Bosch, O, Huse, M & Senneseth, K 1999, Resource configuration, competitive strategies, and corporate entrepreneurship, An Empirical examination of small firms. Entrepreneurship Theory and Practice, Fall. Burns, P 2001, Entrepreneurship and Small Business, Palgrave Macmillan. , New York. Covin, JG & Slevin, DP 1989, ‘Strategic management of small firms in hostile and benign environments’, Strategic Management Journal, vol. 10, no. 1, pp. 75-87. Penrose, E 1959, The theory of the growth of the firm, Willey, NY. Read More