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The Role of Management in Share Holder Wealth Creation Essay

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Updated: May 28th, 2019

Introduction

The main objective of doing business is to gain profits. This is what keeps firms in competition. The main beneficiaries of profits include shareholders, employees and the society.

There should be innovation and creativity. This is meant to ensure that a firm makes profits in the modern world of business that is characterised by stiff competition. Thus, the management not only serves to ensure profitability, but also promote growth and expansion.

When a firm identifies a new market, it produces a product that meets the needs of the market without replacing the existing product. This is what results in continued expansion and growth. Continued growth and expansion are a form of economic growth to the whole society.

Therefore, a firm should ensure that the societal needs are met as it achieves its profits. The profitability of a company is closely related to the positive impacts that it should generate in the community.

Therefore, the management should bear in mind that the growth and profitability of a company are a responsibility to the owners, shareholders and the community. This paper will discuss the role of management in achieving profits for owners and shareholders.

It will relate the benefits of these profits to employees, society and the general economic development of the nation. The management should also focus on the economic benefits expected by the rest of the stakeholders. This is meant to ensure that shareholders gain maximum profits.

Wealth Creation and Economic Development by Management

The business objective of making profits has been integrated with other factors to discourage corporate greed that may be harmful to society. For instance, while a company focuses on making lots of profits, it should be ethical, obey the law, and exercise corporate social responsibility.

This way, the issue of wealth creation benefits shareholders as much as the other stakeholders (Bejou, 2011). Some organisations are known to exercise mechanistic social responsibility projects. These do not distinguish between the obligatory roles and those that are discretionary (Cosans, 2009).

This is evident in the way majority of the business rankings are interested in who made the most profits, how fast a certain organisation has grown, and who gives the executives the most pay. Such factors leave out the community and do not recognise the role that local communities play for companies to register big profits.

This is unfair given that it is the communities that provide markets, convenient locations, and a good environment for these businesses. A firm’s self interest should not override the corporate social responsibility.

Corporate social responsibility provides an opportunity for firms to work with the communities and make a difference in their lives. This can be achieved through exercising integrity, supporting human rights, and minding about the welfare of others in and out of the organisation.

Firms should be responsible for the impact of their operations on stakeholders. They should strive to ensure that their operations have a positive impact on the lives of those around them.

This provides equilibrium between the company’s goals and objectives and meeting the needs of the communities (Bejou, 2011).

Ireland (2003) stated that business growth and wealth creation are closely related. Growth is used by firms as a tool for creating wealth through building economies of skill and gaining market power.

When this happens, firms gain additional resources that translate to a competitive advantage. Similarly, increased wealth allows a firm to allocate more resources resulting to increased growth. This form of interdependence is critical to new market entrants who need to create wealth rapidly.

It calls for strategic management to ensure that firms do not overlook the importance of benefiting the community while creating wealth. Therefore, great emphasises should be put on creating customer value as a way of attracting a bigger market share.

Apart from developing superior products and adjusting market prices, a good reputation by the society can serve as a competitive advantage. This can be enhanced by developing good relations with communities, employees, suppliers and other stakeholders. When wealth creation focuses on the shareholders, it leads to bias.

This is because shareholders are just one of the stakeholders in the firm. Corporate governance that is solely interested on the shareholders is morally unjustified.

Moral responsibility should not be viewed as an obstacle towards rapid wealth creation. It should be a strategy of establishing good business relations that are profitable in the long run (Boatright, 2006).

Economic growth does not need to be large so as to be effective in the long term. Small scale growth over a short period can translate to economic gains that make a lot of difference to recipients. Such gains are highly observable in the long term, and it is impossible to ignore them.

For example, the US economy experienced a continuous economic growth rate of 1.8 per cent over a period of 130 years. This was between 1870 and 2000. This resulted in the growth of GDP from $3,340 to $33,330. Through this growth, the US population gained the best living standards, technology, infrastructure, health care, and a good life.

Similarly, in an organisational setting, small positive gains in profits can result to impressive economic growth in the long run. Therefore, managers should strategise for the plans and decisions that will earn the organisation income continuously. Wealth creation should be a long term goal that can be achieved by creating value in the business.

Management should focus on the strategies that add value to the firm. Traditionally, it was believed that growth came as a result of accumulated capital, productivity in labor and an effective macro economic management. Today, this has changed, and firms are now focusing on innovation and creativity to stay ahead of competitors.

Working closely with customers and communities as stakeholders is a strategy of creating value for the products. If customers see the value that the organisation brings into their lives, they are likely to develop interest in the organisation.

Such benefits include employment opportunities, projects that improve their social skills and products that improve the quality of their lives (Ahlstrom, 2010).

Corporate Social Responsibility

Shaw (2009) identified the main aim of doing business as profit making. However, this requires a human touch on the business goals to ensure that a firm does not overlook the societal needs while concentrating on profit generation.

The value that a society attaches to an organisation is not entirely based on the products. In this case, it also depends on the way the organisation relates with the communities. Corporate social responsibility should be included in the company’s vision and mission. It should be reflected in the business culture, strategies and daily operations.

The main objective of corporate social responsibility is to improve the society’s quality of life by reducing or eliminating suffering. Communities suffer from poverty, in adequate security, pollution and even health related issues.

When a firm is incorporating the needs of the society in its goals, it should also consider that its activities do not bring more suffering (Husted & Salazar, 2000). The management has a responsibility to the company owners to conduct business as per the owner’s interests.

This means that they should generate as much wealth as possible while following the basic societal rules. These rules can either be integrated into law or the general ethical custom. For instance, engaging in pollutant activities without considering the welfare of the adjacent communities can result in decreased value from customers.

The owners expect that the management will take care of such issues while still holding the main objective, which is to maximise profits. Social, corporate responsibility is introduced to provide an interactive session with the communities.

This is meant to ensure that the management does not go against societal expectations. Through this form of interaction, the organisation can identify the society’s needs and expectations. It also builds a good business relationship which benefits both the community and the organisation (Cosans, 2009; Smith, 2003).

The corporate social responsibility exercises should focus on ensuring that they offer global social skills that support the society’s needs in the long term. Some projects may be short term and may not help the communities to become self reliant, they should focus on projects that will give communities some social skills.

An improved economic situation for the communities translates to increase spending that comes back to the firm as increased sales. The employees working in these firms are also part of the communities and should be granted a good working environment that supports freedom.

If firms create a culture that promotes responsible practices in the place of work, it can balance profitability with the responsibility to its employees. These values should be included by forms as part of their essential motives to ensure that there is no bias towards the company’s interests (Bejou, 2011).

Management should have a responsibility to all the stakeholders and not just limited to the shareholders. All parties that are affected by a firm’s corporate policies and practices should be included in a firm’s social and corporate obligations. This includes the community members and the employees (Woiceshyn, 2012).

It is evident that firms that exercise a great deal of social responsibility experience better financial performance and have a better correlation that results into better business performance in the long run (Cosans, 2009). Firms should elect officials who are interested in promoting a collective interest.

This is meant to balance between profit maximisation and maintaining good corporate relations. Firms that organise for corporate social responsibility projects are likely to experience market power over the other firms. Increased social output is reflected in the way a firm acquires income as a result of increased social expenditure.

At times, the social output extended towards the community may not produce instant results based on the income achieved. However, a firm’s image changes over time based on the number of activities in the firm.

Maximum benefits obtained from the social output occur at the point where the firm has extended the maximum possible social output. The process is gradual, and results are mostly determined by the level of involvement that a firm portrays to the community.

On the other hand, firms that engage in wasteful activities experience a decreased market share and reduced market competitiveness (Wright&Bruining, 2008).

Balancing Between Shareholder Management and Stakeholder Management

In the past decades, senior management has experienced pressure from the investors causing them to focus significantly on creating wealth for shareholders. This has resulted in the emergence of performance metrics that are based on the value of firms to the society.

The inclusion of the needs of stakeholders in the planning process is the first step towards ensuring that a company grows its value in the markets. In the first place, there are the capital market stakeholders who include financiers and shareholders.

These are the owners who contribute to the establishment of an organisation, and their main goal in this venture is to gain profits and grow wealth. The second class of stakeholders is the product market stakeholders. They include customers, communities and suppliers.

They play a sensitive role of ensuring that a firm produces its products at a lower cost and gains a market for its products.

The organisational stakeholders, who are mainly employees, also serve a role to ensure that the organisation runs sustainably and provides the right products to the markets (Woiceshyn, 2012).

The value achieved by an organisation from business is defined differently by stakeholders. Shareholder value makes the basic component of business, and this enables a business to thrive. This is what provides long term agility for an organisation.

Customers and the community are also stakeholders. They offer the medium term liquidity which promises a future for the business depending on the response that they give concerning the value of the products.

Employees and partners provide the operational cash flow, which ensures that the organisation stays in operation as an enterprise. The three main classes of stakeholders are equally important and interdependent.

This requires that firms must establish two way communications that help them balance their self interest with altruism. Firms should also balance advocacy with accommodation.

This can only be realised if the interests of the firm and those of the stakeholders are given equal priorities. In this case, both the stakeholders and the firm should compromise for a win-win situation while respecting the needs of each other.

This can also be achieved using the stewardship theory in which people put the needs of others first. This includes organisations that devote themselves towards meeting customer and employee needs before their own self interest.

Employees who are satisfied tend to be productive and are willing to sacrifice their time and energy to achieve better results. This amounts to greater productivity that indirectly meets the profitability of the organisation (Wilcke, 2010).

The social capital theory can also be applied as a way of balancing stakeholder needs with share holder needs. In this theory, all parties in the organisation endeavor to work for the benefit of the organisation and not their own interests.

When individuals concentrate on meeting the interests of the organisation, they achieve a personal satisfaction whereby they meet the organisational targets and even exceed them. In this case, an individual delights in the ability to serve the organisation to its satisfaction.

In so doing, the output increases and the organisation gains profits. Consequently this leads to increased resources. The shareholders should also be involved in this theory. This will give them an opportunity to focus on how much more they can offer to the firm and focus on the expected results.

This will lead to increased profitability because they are likely to allocate considerable resources that imply growth and productivity. There exists a positive link between an involving stakeholder management and improved financial performance.

A firm’s profitability depends on the ability of the organisation to create and distribute resources. In this case, each of the stakeholder groups is regarded as part of the organisation’s stakeholder system. An imbalance may occur if one of the stakeholder groups lags behind the rest.

For instance, if the product market share underperforms, then there is the risk of registering decreased sales. This may lead to losses or even bankruptcy.

Therefore, each of the stake holder groups is significant in the growth and the continuity of an organisation. They should receive equal attention while laying out performance strategies (Keim& Hillman, 2001).

Value creation is a strategy that is being used by organisations to gain a competitive advantage. Good relationships with consumers and primary stakeholders result in continued participation in the firm’s activities. Managing such relationships leads to intangible resources that are socially complex.

These promote a firm’s ability to stay ahead of the competitors in terms of value creation. When consumers and society attach a value towards a firm, they become loyal. This ensures growth and continuity of an organisation (Fraser &Simkins, 2010).

Value creation is along term strategy and can be achieved by developing structures that help employees to resist short term financial activities. For example, the social, corporate responsibility projects that aim at making profits without giving the community members skills that promotes self reliance.

Value creation requires activities that are embedded in the community’s way of living and promote their economic abilities (Keim& Hillman, 2001). End users attach a lot of value to organisations that recognise their role in the firm’s growth and productivity.

When customers are involved in decision making through feedback or interactive discussions, it creates more interest. This is a good strategy that promotes sales growth and value, which is a resource for long term growth and continuity (Beurden, 2008).

Conclusion

Wealth creation by stakeholders is determined by the economic gains that other stakeholders experience. The traditional view of business as a sole profit making venture for the stakeholders has changed. Today, organisations are focusing on value creation as a strategy of gaining a competitive advantage.

This value is created among customers, employees and the community in general. When employees obtain satisfaction from work, they produce better results and customers are enticed by an organisation that minds about their welfare.

Continuous small scale economic growth amounts to impressive economic gains in the long term. Therefore, value creation through the stakeholders is the best strategy that an organisation can use to maximise its profits.

For the management to satisfy the needs of shareholders, it has to give the needs of other stakeholders a priority too. This will ensure that the needs of all stakeholders are considered for the success of the organisation.

Reference List

Ahlstrom, D 2010, Innovation and Growth: How Business Contributes to Society, viewed on 18th August 2012 from:

Bejou, D 2011, ‘Compassion as the New Philosophy of Business’, Journal of Relationship Marketing, vol. 10, pp. 1-6.

Beurden, PV 2008, ‘The Worth of Values – A Literature Review on the Relation Between Corporate Social and Financial Performance’, Journal of Business Ethics, vol. 82, pp. 407-424.

Boatright, JR 2006, ‘What’s Wrong—and What’s Right—with Stakeholder Management’, Journal of Private Enterprise, vol. 21 no. 2, pp. 106-116.

Cosans, C 2009, ‘Does Milton Friedman Support a Vigorous Business Ethics?’Journal of Business Ethics ,vol. 87, pp. 391-399.

Fraser, J &Simkins, BJ 2010, Enterprise risk management: today’s leading research and best practices for tomorrow’s executives, J. Wiley & Sons, Hoboken, N.J.

Husted, BW & Salazar JJ 2000, ‘Taking Friedman Seriously: Maximizing Profits and Social Performance’, Journal of Management Studies, vol. 43, no. 1, pp. 75-91.

Ireland, R D 2003, ‘A Model of Strategic Entrepreneurship: The Construct and its Dimensions’, Journal of Management, vol. 29, no. 6, pp.963-989.

Keim, GD & Hillman, AJ 2001,’Shareholder value, stakeholder management, and social issues: what’s the bottom line?’Strategic Management Journal, vol. 22, pp.125-139.

Shaw, WH 2009, ‘Marxism, Business Ethics, and Corporate Social Responsibility’, Journal of Business Ethics, vol. 84, pp. 565-576.

Smith, C 2003, ‘Corporate Social Responsibility: Whether or How?’California Management Review, vol. 45, no. 4 pp. 52-76.

Wilcke, RW 2010, ‘An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis’, A Journal of Political Economy, vol. 14 no. 4, pp. 187-209.

Woiceshyn, J 2012, How to be profitable and moral: a rational egoist approach to business, Hamilton Books,Lanham, Md.

Wright, M &Bruining, H 2008, Private equity and management buy-outs. Edward Elgar, Cheltenham.

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