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For-Profit Public Companies Challenges Term Paper

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Updated: May 4th, 2020

Introduction

With the capitalism that prevails in the United States, for-profit organizations have to implement efficient strategies for their survival. Furthermore, with the rising competition between the public and private companies, most managers focus on improving the companies’ image in a bid to attract as many investors as possible. In most cases, attracting investment requires the protection of the already existing investors. The protection of investors requires effective enforcement of the law coupled with maintaining a company’s positive image.

However, investments in for-profit public companies have been marred by deficiencies that prevail in such organizations in the contemporary times. For-profit public companies experience a variety of challenges due to the “recurrent scandals, political interferences, and the proliferation of new corporate structures such as the B-corps” (Sale, 2011, p. 139).

Recurrent scandals

One of the recurrent scandals in the for-profit companies is fraud. According to Pickering (2014), fraud entails deliberate misappropriation of an organization’s funds by the management through subordinate employees. In most cases, recurrent scandals are highly publicized, thus attracting the attention from members of the public. In the case of fraudulent transactions, scandals paint an organization as a victim of questionable accounting practices, thus exposing the management to criminal consequences (Sale, 2011). Financial scandals affect the company’s independence and accountability by attracting the attention of the authorities.

In the United States, for-profit public companies are bound by the Sarbanes-Oxley rules in terms of the management of an organization’s finances. In the case of fraud, the act subjects the affected public corporations to scrutiny. Such a scrutiny forces the company to incur consultation fees that form part of the compliance costs that reduce the profit margins, hence the wellbeing of an organization (Pickering, 2014).

Additionally, recurrent scandals degrade the investors’ confidence significantly. According to Honeyman (2014), investors are ready and willing to risk their money in investments that will guarantee a profitable return. With the recurrent scandals, stock prices of the affected companies drop in value, thus generating a loss to the current investors. Furthermore, recurrent scandals are a sign of inadequate and insufficient internal controls and disclosures within the affected public company.

The prevalence of insufficient controls will scare potential investors from investing in a given company, whereas some of the current investors will begin withdrawing their investments. Such a move by the investors makes it difficult for a company to outperform its competitors both in the local and international markets (Honeyman, 2014).

Recurrent scandals not only affect the investors’ confidence, but also the affected company’s image. According to the available literature, most profit-driven public companies seek short-term profits in a bid to satisfy the involved stockholders (Pickering, 2014). In the majority of such circumstances, the management disregards long-term risks for the sake of generating profits. Such a move highlights the management’s focus on immediate satisfaction, as opposed to avoiding long-term risks that expose the company to long-term costs that will affect the investors’ return on investment.

With a focus on the short-term profits that generate immediate satisfaction, the company’s management is likely to indulge in practices that violate the company’s policy on environmental concerns among other responsibilities to the society (Hooker, 2011).

From this analysis, it is evident that for-profit companies that focus on profit maximization tend to be poorly positioned, especially in self-regulation and evaluation of risks. In the end, the management’s decisions not only wreck the stockholders’ incomes, but also the country’s financial sector in general. The management’s failure to protect the stockholders’ investments against risks devalues an organization’s image to the society.

Moreover, most recurrent scandals such as a company’s failure to adhere to its policy on social responsibility attract legal suits. In most cases, the legal suits attract hefty fines and they are financed by the stockholders. Furthermore, the tainted image of the company that arises from the publicized scandals discourages talented employees from joining the involved organization (Sale, 2011). According to the available literature, a company’s image is a reflection of the employees’ collective behavior as determined by the corporate culture and rules (Honeyman, 2014).

Working for a corrupt or scandalous organization taints the employees’ image, as the members of the public perceive such individuals as disgraceful. Furthermore, with the affected earnings, the company may fail to maintain a safe working environment that offers job security, incentives, and competitive pay packages to employees. With such challenges, the majority of the employees leave the company to join competitors who outdo the affected firm in the end.

In addition, the increased rate of labor turnover in the affected company has adverse effects on its revenues. Such a move could be catastrophic, especially if the employees had been trained by the company and left before serving for a considerable period. In such a case, the company incurs massive expenses in replacing the leaving employees. Furthermore, as employees leave for other companies, they create a gap in the company’s diversified workforce, and this aspect contributes to the loss of talent, hence inhibiting innovativeness and creativity (Honeyman, 2014).

In most cases, the lack of a diversified workforce contributes to the poor innovativeness in the management practices and the overall company’s practices and processes. Such a move accounts for the poorer quality of products and services offered by the public companies in as compared to the for-profit private companies (Pickering, 2014).

Further research highlights recurrent scandals as the source for fictional and unrealistic standards within for-profit public organizations (Pickering, 2014). In trying to correct the damaged public image, some of the affected companies engage in philanthropic activities toward the surrounding society. According to the available research, what motivates the management is the belief that engaging in philanthropy entails a prioritization of the investors’ interests (Sale, 2011). However, these managers forget that philanthropic activities require the spending of the stockholders’ funds.

Therefore, to some extent, such managerial practices may imply ignorance of the shareholders’ interests. In such circumstances, the management adopts fictional accountability mechanisms in a bid to strike a balance between their interests and those of the shareholders. In addition, it is illogic and unrealistic for the corporation to indulge in philanthropy at the expense of shareholders’ interests (Sale, 2011).

Political attacks

In for-profit public companies, political powers come into play especially in protecting the public’s interests together with those of the shareholders. In such a set up, political influence plays a significant role especially in the election of the board of directors and the top management (Sale, 2011).

According Honeyman (2014), most directors in public corporations are influential persons in the government and this aspect contributes to corruption in the management in addition to the lack of innovativeness and creativity. Unlike in the public sector, private companies select their top managers based on the merit and reputation. With this trend, private companies are in a position to get better management team than the public companies. This realization underscores the notable development in the private sector than the public sector (Honeyman, 2014).

According to Sale (2011), for-profit public companies are bound under some of the rules that exist due to political activities. For example, it is the responsibility of the management to disclose to the public the company’s financial reports at least once per year. In some circumstances, the performance of these companies is debated in political forums as the authorities try to find out what can be done to improve performance or meet some of the shareholders’ interests (Pickering, 2014). In most cases, political interference bars independence especially when disclosing some of the accounting entries.

In addition to interfering with the company’s independence, political intervention accounts for the rising cases of corruption within public companies. For example, directors can use their political links and powers to avoid being ousted, despite shareholders casting a vote of no confidence against them (Hooker, 2011). Furthermore, through the political links, corrupt directors and top executives manage to repel legal actions for the mismanagement of the company’s funds.

In some circumstances, such individuals are punishable under the law, but due to their political links, the meted punishment does not match with the seriousness of the corporate crime in question. Moreover, through political links, the accused parties continue serving the company or they are transferred to work in other public companies despite the outstanding accusations (Sale, 2011). According (Hooker, 2011), directors and top managers in public companies have a duty of protecting the shareholders’ interests in conjunction with the law.

Although corporate law requires directors and manager to maximize the shareholders’ earnings in good faith, some corrupt managers will use their political powers to misappropriate these funds. With the insufficient funds, public companies fail to withstand market pressures, hence their failure. In the long term, the company’s ability to create wealth fades, thus scaring away potential investors (Sale, 2011).

According to Sale (2011), political attacks contribute to controversies especially in the formulation of take-over decisions by the shareholders. The government, as a political agent and a stakeholder in public companies, may complicate take-over or merger procedures by enacting laws that pose a challenge to these procedures. Such controversies arise in the cases in which politicians are bound to lose their interests in the company following a merger or take-over or changes in the management (Sale, 2011).

With most directors having political interests in different parties, they tend to use a significant proportion of the company’s finances in funding political activities for future favors. With such moves, most public companies in the recent times have implemented political corporate donations at the expense of shareholders. Currently, the United States among other countries lack a law that requires public companies to disclose donations made to political organizations.

In the course of disclosure, such funds are divulged under the donations, thus making it difficult for the shareholders to raise an alarm concerning this avenue of misappropriation of their finances. In such a circumstance, the top management continues to gain political influence at the expense of the shareholders, whose funds are misappropriated in the course of such donations (Sale, 2011).

Alternative corporate structures such as B-corporation

Recent research highlights the prevalence of a new form of corporate structure, viz. the B-corporation (Honeyman, 2014). Such entities are partial for-profit and non-profit organizations and they operate as legal entities in the United States. The increment in the number of businesses adopting the new structures in the market poses a significant challenge to the profit-making public companies. Primarily, these new structures such as the B-corporation pose incomparable levels of competition and set standards that public companies can hardly achieve (Sale, 2011).

For example, with the B-corporations, they not only garner the investors’ support, but also guarantee protection against liability on personal assets. In such circumstances, personal assets will not be affected in case the corporation runs bankrupt. Unlike in the public corporations, liability protection ensures that business risks cannot affect an investor’s assets beyond what is invested in the corporation (Honeyman, 2014). However, with the public companies that have different types of shareholders, some circumstances require the attachment of personal assets to settle liabilities incurred by the shareholders (Pickering, 2014).

Nevertheless, most structures such as private limited companies and B-corporations establish a strong financial base prior to assuming full operations. A strong financial base ensures that the company indulges in its projects among other operations efficiently. Although public companies may have access to government funding, these finances take a significant time prior to their release due to the bureaucracies involved.

Furthermore, in the recent times, most non-governmental financial institutions prefer lending to other forms of corporations as opposed to public companies. Such a trend makes it difficult for public companies to access funds from financial institutions in case of insufficient or delayed grants or loans from the government (Sale, 2011).

According to Pickering (2014), the majority of public companies hardly focus on compliance, sustainability, and building investors’ wealth. However, B-corporations among other corporate structures focus on combining different organizational aspects that not only contribute to compliance and welfare of the shareholders, but also consider the corporation’s responsibility to society.

With the application of substantive standards, transparency, and credibility, hybrid corporations make it difficult for public companies to reach such a level, thus posing very high level of competition to the public companies. Such high levels of competition pose threat to the survival of public companies (Pickering, 2014). Ultimately, private companies end up performing well in the market as opposed to public organizations, which struggle with management issues due to external factors like politics and personal endeavors.

Conclusion

In the recent past, public companies have been experiencing various challenges due to recurrent scandals, political influence, and proliferation of new hybrid corporate structures. With the prevalence of highly publicized scandals such as corporate frauds and noncompliance with the corporate law on social responsibility, for-profit public companies encounter legal suits that claim a significant proportion of the shareholders’ funds.

Furthermore, the scandals degenerate the company’s image, thus damaging the investors’ confidence. With political influence, politicians shape the composition of the company’s board of directors and other top managers. This aspect leads to the formation of a team that lacks talents to inspire creativity and innovativeness in the company. With the recent proliferation of new corporate structures, public companies find it difficult to keep to the high standards and levels of competition set by these rival corporations.

References

Honeyman, R. (2014). The B Corp Handbook: How to Use Business as a Force for Good. San Francisco, CA: Berrett-Koehler Publishers.

Hooker, J. (2011). Business ethics as rational choice. Upper Saddle River, NJ: Prentice Hall.

Pickering, M. (2014). Accounting firm partners to public corporation employees: An exploration of implications and responses in a failed accounting company. Journal of Accounting & Organizational Change, 11(1), 96-129.

Sale, H. (2011). The new public corporation. Law and Contemporary Problems, 74(1), 137-140.

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