Managerial vs Stockholder interests, Time value of money and running of business using Christian Principles
QUESTION 1
Part 1: Stockholders and Management Interests
Practically, more often than not, stockholder interests do not align with the interests of managers. I once interned in a big firm. During that period, the company called an emergency meeting for all employees and stockholders. There was a big concern on how managers kept increasing their salaries each year, yet the profits of the firm had remained stagnant for the last four years. The stockholders announced that all the three managers were demoted and that their positions were now vacant for other employees within the firm to apply for. The new successors were required to sign performance contracts with which they would be appraised.
Several motivational tools can aid in aligning stockholder and management interest. The first tool is punishing managers who intentionally or unthoughtfully scheme ways in order not to maximize shareholder wealth. This can be done through the issuance of performance contracts or through firing or demoting them. This helps in resolving potential conflicts among managers and stockholders as managers are keener as not to misuse company’s wealth. The second tool is by the use of considerate compensation packages for managers. This helps resolve the potential conflict as it ensures managers are well rewarded and have no logical reason for coming up with excuses for unreasonable bonuses and salary increments occasionally.
Part 2: Application of Concepts/Time Value of Money
Time value of money is a concept that states that the value of money now in more than the value of the same amount of money in the future, as long as money can earn interest. This concept is, therefore, essential for managers in their decision making. This is because it helps managers understand that in order to know the profitability of an investment, they should consider the value of the currency now rather than in the future. Therefore, in choosing where to invest, they should select projects or returns that offer higher returns in the future.
For investors, if they want to know the value of an asset or investment in the future, they should discount that future value given the current discount rate. This is the guidance that managers should offer investors so as to ensure their investment decisions are well informed. Managers should, therefore, use the time value of money concept to understand that the company should best invest its money today and earn interest as the organization is existing in the present time, instead of saving. In the case of financial instruments such as bonds, they should be stated in their original costs for their valuation.
QUESTION 2
Ethics in business are the moral principles that guide business practices when it comes to the controversies that can and may arise in the business environment. Corporate social responsibility (CSR) is a principle whereby organizations contribute to the welfare of the society through philanthropic acts, supporting community goals and charitable events as well as ensure their activities are ethical in nature. When aiming to achieve the company goal of shareholder wealth maximization, there is bound to be a conflict between achieving this goal and the organization carrying corporate social responsibility and remaining ethical as well.
First, most CSR activities require funding by the organization initiating it. This leads to a reduction in company finances and wealth, hence conflicting with the goal of wealth maximization. Another way shareholder wealth can be maximized is through overcharging the prices of products and services to gain more profits. This, however, is unethical. Another unethical instance is whereby an organization decides to maximize shareholder wealth by not paying all the required taxes or using substandard raw materials in their production so as to save on cost.
Christian principles include justice, self-control, excellence, love, integrity, and patience. Exercising Christian principles plays a part in the running of a successful business while operating within state and federal regulations. This is because a leader who applies the mentioned Christian principles ensure that the practices of the business are ethical and lawful. Integrity is very fundamental in the running of a successful business. The principle ensures that the organization does not just take any convenient way out in its business practices. Instead, it exercises honesty as a core value in its practices and pays all required taxes according to state and federal regulations. This helps in the building of a strong professional reputation.
Love, patience and self-control guide the business leader on how to treat employees, competitors, suppliers and customers. Even during trying times, such a leader is able to maintain unity and cohesion at the workplace. Excellence ensures that the leader does the best of his abilities to ensure the successful running of the business. He/she does not mind working overtime or going the extra mile even when no one is watching to ensure that the company delivers the best quality services and products. Customers are loyal to a business that practices ethics.