Successful Board Management Tools - Assignment Example

Part Two Introduction In many instances, the financial decisions of a business and any other corporate entities are not always arrived at from a vacuum. A decision that may seem to be very obvious in the business from an economic perspective can sometimes be affected by an appreciation of the various restrictions being imposed by the business environment prevailing (Hill 2008, 67). However, it is essential that business managers strive at achieving the vision and mission of the business through attaining the set goals and objectives. Generally, firms often have various kinds of objectives that they always look forward to achieve. However, among all these objectives, the main one for business organisations is supposed to be an increase of the value to its shareholders. In this case, the bid to maximize the wealth of its shareholders becomes a fundamental goal of management. It is important to note that investors often anticipate earning satisfactory returns from the investments they establish in the firm. Shareholders are the actual owners of the business, which means that senior managers are have a responsibility to ensure maximisation of investor’s wealth, not just for the success of the business, but also for continued investments, thus gaining the ability to increase its market share and financial position. Maximizing this wealth can be determined by the payout of dividends as well as capital gains through an increasing market value for a particular share price of the business. In the process of achieving this objective, conflicts can sometimes arise in the business. In this case, business managers may end up making decisions based on their interests and not achieving the investors’ wealth. Therefore, traditional view is that profit maximization needs to be made the ultimate goal and objective for the business. The theory of profit maximization and the investors’ wealth Financial managers are often involved in managing cash flows on behalf of the companies they work for as well as their respective owners. In any firm, financial management is often concerned with the process of making decisions in three main areas, which include; investing, financing as well as dividend policy. In all these, wealth maximization always remains to be the fundamental goal for the firm. Business managers are expected to ensure that they effectively manage the stock prices for the benefit of their respective shareholders since they are needed towards increasing the financial muscles for the company so that it can achieve its other objectives (Kaen 2003, 87). In this case, the criticisms raised against this approach by managers may seem understandable; this means that in terms of prioritization, maximizing the value of its shareholders wealth is very essential towards ensuring that is profitable in the short and long term. It is important to understand that profit maximization as well as wealth maximization are both essential in the process of creating ethical analyses for the wealth maximization process of its shareholders. However, some people have often said that business firms are not to show and give all their resources towards achievement of the objective of maximizing shareholders at the expense of social responsibility (Brigham & Houston 2004, 44), which is equally important towards ensuring the growth and success of the business. These divergent views emphasize that the success of the business is not just dependent on the process of increasing its profits alone. It is a process comprised of various factors, which are essential towards sustaining these profits. Businesses are expected to ensure that they divide their efforts and actions equally towards achieving the profit maximization objective and maximizing the wealth of its shareholders as well as developing business in sustainable way. In this case, investing in activities like corporate social responsibility are helpful towards ensuring that the business creates a good image for itself (Jakhotiya 2003, 43). The concept of Corporate Social Responsibility (CSR) Corporate social responsibility is based on three major pillars, which form a triple bottom line (TBL). TBL is an accounting framework, which is based not only on financial dimension of a firm’s performance, but also on social and environmental dimensions (Williams, 2013; Slaper and Hall, 2011). (Source: Patel, n.d.). With a continuous growth of public awareness about climate change, environmental issues, poverty, discrimination and other social inequalities, more and more people expect that the companies will pursue not only the economic but also social and environmental goals and objectives. Thus, in addition to shareholders’ interest the management needs to take into consideration the interest of general public and firm’s customers/clients (Williams, 2013). While shareholders invest into the business, customers is the major source of profit generation. Therefore, in order to stay profitable in today’s highly competitive global market, firms should develop sustainable strategies, pursuing not only financial, but also environmental and social goals. The conflict of ownership and control Generally, it is not possible to expect that company’s managers and directors can protect their money in the same way they protect that of the businesses they have. In this case, the conflict of control and ownership in the business is bound to happen at all times in the course of its existence (Monks & Minow 2004, 41). In large corporate organizations, this conflict may sometimes be rare considering the fact that the system of corporate governance is sometimes actively involved in the actual management of the corporative. In this case, the main goal of maximizing wealth and profits in the business appears to be in tandem with the businesses’ ethical theory of utilitarianism while allocating the business resources under various circumstances (Kim & Nofsinger 2007, 28). In order not to affect the performance and success of the business towards achieving its set objectives, it is important that the separation of ownership exists, this is in terms of decision makers, owners as well as other stakeholders actively involved in the business. Conclusion The primary financial objective of companies is usually said to be the maximisation of shareholders’ wealth. Actually it is a primary objective of any entrepreneurial and commercial activity. However, nowadays, an increasing number of stakeholders (customers, general public, government, media, etc.) promote the concept of corporate social responsibility to the business world. Often management has to sacrifice profits or other economic benefits for the sake of environmental or social objectives. Environmental and social factors are increasingly affecting business decisions, making it very difficult to pursue the goal of increasing the shareholder’s wealth. Moreover, the situation becomes more challenging when there is a conflict of control and corporate ownership as publicly traded organisations are often a subject of examination for sustainable business practices. Thus, managers should focus on finding a win-win solutions, whereas all three elements of the triple-bottom line are implemented in the company’s strategy. References: Brigham, E., & Houston, J. 2004. Fundamentals of financial management (10th ed.). Thomson/South-Western, Mason, Ohio. Haynes, K., Murray, A. and Dillard, J. 2012. Corporate social responsibility. Abingdon, Oxon: Routledge. Hilb, M. 2005. New corporate governance successful board management tools. Springer-Verlag, Berlin. Hill, R. 2008. Strategic Financial Management. [S.n.], S.l. Jakhotiya, G. 2003. Strategic financial management. Vikas Pub. House Pvt, New Delhi. Kaen, F. 2003. A blueprint for corporate governance strategy, accountability, and the preservation of shareholder value. AMACOM, New York. Kim, K., & Nofsinger, J. 2007. Corporate governance (2nd ed.). Pearson/Prentice Hall, Upper Saddle River, N.J. Monks, R., & Minow, N. 2004. Corporate governance (3rd ed.). Blackwell Pub, Malden, Mass. Paramasivan, C., & Subramanian, T. 2009. Financial management. New Age International (P), New Delhi. Patel, S. n.d.. Triple Bottom Line and Eco-Efficiency. [online] Ecogreenhotel.com. Available at: https://www.ecogreenhotel.com/ecogreen-newsletter/EGH_Feb/eco-feature-tbl.html Slaper, T. and Hall, T. 2011. The Triple Bottom Line: What Is It and How Does It Work?. [online] Ibrc.indiana.edu. Available at: http://www.ibrc.indiana.edu/ibr/2011/spring/article2.html Solomon, J., & Solomon, A. 2004. Corporate governance and accountability. John Wiley, New York. Williams, O. 2013. Corporate social responsibility. The Role of Business in Sustainable Development. Routledge. Read More