The Clash Between Management And Ownership

1311 Words6 Pages
For sole proprietorship, the firm has a single owner who runs the firm, the goal and vision is clear because the goal of the firm is what the owner desires. In contrast, problems tend to arise when it comes to organizational form of business. A large public organization has hundreds of thousands of shareholders in the firm who owes the business. And each of them will have different preference to wealth, risk tolerance, investment decisions, strategy and so on. They cannot possibly manage or have control over the business directly, therefore a separation of ownership and control is needed. A managing team will run the corporation and this will easily lead to conflicts between the interest of the management and the shareholders. In this…show more content…
Financial manages will use the cash from banks or rose by selling securities to investors in the financial market to pay for different investment projects. Then as the business runs it will generate cash. Cash will be then either be reinvested or paid back to the shareholders as dividend. In this case, it explains that for shareholders despite the fact that they might have different preferences as mentioned, but mainly they have the same financial goals; they want the financial manager to maximize the current market value of shareholders’ investment in the firm. There is only one single way for managers to maximize the value of the firm, which is to increase firm’s market value and current price of shares. Leading to the problem, some managers have different goals and objectives, for example some manages may want to maximize profits, maximize profits does not equally means maximize firm’s market value. Firstly, this is because maximize profits might need to cutting back on investing on intangible assets. Such as staff trainings, maintenance, research and development etc, but these add long-term value to the firm. Surely shareholders will not be happy when these add short-term value to the firm but causing damages to long-term profits. Also companies might be able to increase their future profit by cutting this year’s dividend and investing the freed-up cash for the firm. This might not be what the shareholders want as well since they get paid
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