Divorce of Ownership Essay

647 Words Apr 5th, 2012 3 Pages
4 (b) Evaluate the argument that managers controlling large companies might follow policies which do not necessarily maximise the profits of the owners.
There is a divorce of ownership is the difference between people who own the firm who are the shareholders, and the people who control the firm the managers. The shareholders are investors into the firm and want the firm to make a profit so they receive dividends which is a share of the profit, they want to maximise their dividends/profits. Managers work on behalf of the shareholders and are responsible for the running of the firm and they receive a wage/salary for doing this.
There are two types of profits; the first is normal profit which is the level of profit that is required to keep
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So the managers may believe that it is worth it for the firm to take a cut in profits in order to keep customers happy. However this may mean that shareholders may not receive as high a level of dividend as they could before because of the rise in costs. Even though this aim firstly looks like its compromising the aim of profit maximisation it may in the long run help maintain it because if customers stop purchasing then sales could fall and damage profits.

Even though managers may not always aim for the same as shareholders in terms of maximising profits, they must ensure that they do generate good levels of profits. So in short run managers may not want to maximise profits but they must address this in the long run .Otherwise shareholder may become dissatisfied and either vote out managers at the AGM or they will just sell their stake in the firm and if this is done on large scale the firm may become prone to a takeover.
Also unless the firm makes a profit then it won’t be able to continue to operate, so the managers must consider this above its other objectives such as ethics and brand recognition. Without breaking even the cost will exceed the revenue and the firm would have to close. Also without making a profit the firm would not be able to keep its shareholders or even attract new investors and therefore shut down. This means that managers must take profit into

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