The term registration is defined as the process, by which the company files required documents at SEC with the details of the particulars of anticipated public offering ("Registered company Definition - NASDAQ.com," n.d.).
On contrast to that, holding companies, which do not sell the shares to the public, do not require to register with SEC. However, the SCE requires a common holding company to register under the Investment Company Act 1940
The main difference between registered and unregistered holding company are the SEC agreement regulations according to which the registered company must work.
We are dealing with these registered companies as the firm whose objectives are discussed below.
Now, any registered public company has its various stakeholders like debtors, customers, owners, government and so on. In the public companies and firms, shareholders are also one of the stakeholders. All the shareholders are the stakeholders of the companies, but not all stakeholders are the shareholders. Shareholders of a company can be defined as any individual person, or company or other institution, which owns at least one share of the company’s stock. They are the owners of the company. The persons who bought the shares or stock of the company indicates their ownership over the firm. Even if the business is a one-person shop, the owner is considered as the shareholder. For the huge corporations, however, it has separate BOD (board of directors) which is comprised of shareholders. The selection of which is based on the percentage of the money they have invested.
However, shareholders and stakeholders are different. While the shareholder owns a percentage of the company through stock ownership, the other stakeholders are involved in the company for other reasons rather than concern for stock appreciation. Other stakeholders of the registered companies are the (MacEachern, 2008):
employees of the company
lenders or bondholders who are interested in good performance for the reduced risk of default
Customer, those who rely on the company’s good or services.
Suppliers whose earnings rely on the company’s performance.
Government
Shareholders may be the largest stakeholders as they are directly affected by the performance of the company, but there are other groups of stakeholders too since they are also directly or indirectly affected by the performance of the company.
Hence, shareholders are just a subdivision of Stakeholders. The shareholders of a public registered company unlike that of sole proprietorships or partnerships are not individually obliged for the debt of the company and other obligations that the company owns. They are also not directly involved in the day-to-day affairs of the company. The separate management team, board of directors (BOD) and executive management along with some staffs are employed for that purpose. The shareholders, however, have the right to vote on the corporate matters like choosing BOD, the decision of mergers and so on (Peavler, 2015).
One of the objectives of the firm is to maximize the wealth of these shareholders of the company. It may be through higher dividend for the shareholders or through the capital gain (Peavler, 2015). Now if it is asked why the firm should look to maximize their wealth, then it is because shareholders are the owners of the firm. Their investment, their risk taking on the firm is what has made the existence of the firm. If the firm does not look for the wealth maximization of the shareholders, they would claim back their investment leading the extinction of the firm eventually as the firm could not be run solely on the debt investment by the managers.
Now the wealth-maximizing means the tendency to increase the stock price in the market. The wealth of the individual holding the stock of the firm automatically increases, with the increment in stock price. And along with that the value of the firm goes up.
Wealth maximization of the shareholders is the prime objective of the registered firm. Without any doubt, this objective is superior. However, other stakeholders like customers, employees, BOD, managers, and so on also needs positive incentive from the organization. Sometimes, the corporate goal of wealth maximization does not address concerns of any of these stakeholders.
It is necessary for the firm to understand that whether the manager must take a decision only for shareholders neglecting other stakeholders’ interest or not. What if the manager cannot address the interest of others? The company after all is supported by other stakeholders as well. For example, if suppliers of the firm do not supply material or quality material, the firm cannot produce a quality product (Economicshelp.org,2015). If employees work carelessly, there is nothing manager alone can do. So is with customers and other stakeholders. If the government is dissatisfied with the firm, it can cancel the license of the firm. Also, if managers are not benefited from the firm, they lose motivation to work. Eventually, that will be reflected in the company’s performance. Hence, because of this, the firm also needs to undertake objectives, other than just wealth maximization of the shareholders. Ignoring stakeholder’s welfare and interest will lead to a reduction in wealth generation for the shareholder (Economicshelp.org, 2015).
Hence, apart from wealth maximization for the shareholders registered companies also have other objectives like;
Sales Maximization:
Sales maximization helps to capture the market. Companies often tend to increase their market share even though the profit is less. They tend to increase market share in order to increase monopoly power that may enable them to raise the price in the future. The increase in market share also increases the reputation of the company. The managers of the company with high reputation automatically are the center of attraction. The reputation of the firm also makes the firm credible for other stakeholders like suppliers and government. (Economicshelp.org, 2015).
Growth maximization:
The objective of growth maximization is similar to that of sales maximization. In this case, the market share is increased through mergers and takeovers.
Social/Environmental Concerns:
Firms often expend their income in social activities and environment conservation program as their corporate social responsibilities. They may be concerned about local community and charitable concerns. They adopt such strategies to stay in harmony with the society and to build the brand image in the society.
Profit Satisfying:
There is a problem in registered company. Owners want to maximize profit, but the managers do not get many incentives to do so as they are deprived of such rewards like dividend and capital gains. Hence, managers tend to create a minimum level of profit just enough to make shareholders satisfied but focus on other objectives such as enjoying work, getting on with other workers.
These were some of the objectives of registered companies other than the maximizing wealth of shareholders.
There are also certain agency problems that occur due to conflict of interest between company’s management and company’s shareholders. In a registered company, owners are separated from the day-to-day operation of the company. Instead, managers are employed to conduct the day-to-day operation of the firm. Since, shareholders themselves cannot be involved in the day-to-day activity due to various reasons like lack of time, lack of expertise or feeling of managing the business themselves, managers are appointed as their agents. However, sometimes this gives rise to conflicts known as a principle agent problem (Conflicts between Managers and Shareholders. 2015).
Adam Smith firstly identified this conflict with respect to ownership and control. According to Adam, the BOD is not able to defend the wealth of the shareholders with the way he protects his personal wealth. According to him, managers tends to maximize their own benefits like an increase in salaries, bonus packages, comforting his personal working area, etc. rather than working for the prime objective of the firm. This usually happens, when they are not monitored. Apart from that, the managers do not take the projects that might threaten their posts and position. They may turndown value creating investment opportunities rather than taking risks for their position. Also, managers tend to retain information to themselves and do not release the information for shareholders. They tend to hide the negative information from the shareholders. This is also known as information asymmetry. The Satyam Scandal can be taken as an example. The chairman of Satyam Computer Services, one of the top IT Company of the world, Raju Ramalingam along with his top executives manipulated the account by $1.47 billion. He retained the information within himself until it was too late. As a consequence, many investors lose their investment.
Sometimes, managers even put illegal ways to fulfill their personal interest by sacrificing the objective of the shareholders. The Robert Maxwell scandal can be taken as an example. Robert Maxwell, who was the British media proprietor and Member of Parliament, raided the pension fund of his company into the fund share price support program that was illegal. This lead British government to reform the corporate governance practices (Blasi, Kruse, & Bernstein, 2003).
There other various theories and arguments put forward by economists and theorists about the principle-agent problem. Some authors argue that the Shareholder Theory is the one that makes managers take short-term objectives instead adhering to long-term ones and act unethically. The objective clashes arise when shareholders invest for the long term, but managers are concerned with short-term benefit. This generally happens because managers tend to prove their importance in the firm as soon as they are appointed. They make decisions on achieving short-term success, and this may not favor the long-term goal of the firm. (Blasi, Kruse, & Bernstein, 2003). Another author Jensen has argued, that it is the responsibility of managers to maximize the future cash flow along with considering the interest of stakeholders. Freeman (1984) supports the same notion telling that a firm needs to consider both shareholders and stakeholders while making business decisions (Blasi, Kruse, & Bernstein, 2003).
Jenson (Blasi, Kruse, & Bernstein, 2003) further puts the argument that while management puts effort for increasing the stock prices, they could implement actions that can destroy the long-term objectives of the firm by various activities like manipulation, delay of positive NPV projects, use of unethical shortcuts, cost cut on research and development, and so on. The example of Enron can be taken for the scenario where the management hid their debt through off-balance sheet activities and also manipulated the accounts of the company.
Hence, various problems arise when the objective of the managers differs from the objective of shareholders and when the shareholders do not monitor managers. The problems are there, but the solutions are also there.
It has been identified after the series of firm collapse like Satyam, Enron, BCCI and so on, that the practice of good Corporate Governance is required to address principle agency problem. Various research have been done for good corporate governance practice to solve the agency problem. Some of the solutions may be:
Use of Standard Economic Model:
The main interest of the model is about motivating workers to solve agency problems. An assumption has been made in economic studies that persons have a specific extrinsic motivation, specifically monetary motivation as they aim to enjoy the consumption of private quality goods. Individuals are generally inclined towards leisure and value consumption. The agency problem arises to the point where work cannot be perfectly measured, and it needs to be bridged by inducing monetary rewards designing. One of the standard solution agency problems could be thus practicing different rewards and punishments according to the performance of the employee. This helps in enhancing the credibility of managers and other employees. This includes push factors like monitoring, dismissal, suspending provisions, at one side and pull factors like incentive of bonuses, promotions, and equity ownership on other (Armour, Hansmann & Kraakman, 2015).
Intrinsic Motivation
Through the economic point of view, it can be seen that the main reason for going towards intrinsic motivation is for reducing the need for clear motivation payment. When persons are given independence in performing tasks, they are found to be more productive and creative. The main notion of this method is that persons contribute their best effort when allowed them to work free rather than for the reason that they are paid to do so. These types of motivation give person to be loyal to the objective of the firm. Hence, intrinsic motivation may be another solution to check the principle agent problem (Armour, Hansmann & Kraakman, 2015).
Gatekeeper Control
Gatekeeper control is done by recruiting personals who are not directly related to firms like lawyers, and accountants. Enrollment of such non-corporate performer helps in exposing the gatekeepers of the company towards sanctions if they are found to practice mischievous activities. The practice of gatekeeper control checks in the failure of preventing the misconduct.
Hence, in conclusion, the prime objectives of any registered company is to maximize the wealth of its shareholders and to support it, it also must set other objectives to satisfy its numerous stakeholders. On the process of doing so, there may arise many agency problems and costs and to check it the good corporate governance practice are required.
References
Armour, J., Hansmann, H., & Kraakman, R. (2015). AGENCY PROBLEMS, LEGAL STRATEGIES AND ENFORCEMENT (1st ed.).
Besley, T., & Ghatak, M. (2015). Solving Agency Problems (1st ed.).
Blasi, J. R., Kruse, D., & Bernstein, A. (2003). In the company of owners: The truth about stock options (and why every employee should have them). New York: Basic Books.
Conflicts Between Managers and Shareholders. (2015). Boundless. Retrieved from https://www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-field-and-goals-of-financial-management-1/agency-and-conflicts-of-interest-28/conflicts-between-managers-and-shareholders-167-3833/
Economicshelp.org,. (2015). Economic Objectives of Firms | Economics Help. Retrieved 21 July 2015, from http://www.economicshelp.org/microessays/costs/objectives-firms/
Efinancemanagement.com,. (2015). Shareholder’s Wealth Maximization Vs. Stakeholder Welfare as a Corporate Objective | eFinanceManagement. Retrieved 21 July 2015, from http://www.efinancemanagement.com/financial-management/shareholders-wealth-maximization-vs-stakeholder-welfare-as-a-corporate-objective
MacEachern, A. (2008). What is the difference between a shareholder and a stakeholder?.Investopedia. Retrieved 21 July 2015, from http://www.investopedia.com/ask/answers/08/difference-between-a-shareholder-and-a-stakeholder.asp
Peavler, R. (2015). What Every Business Should Know Before Taking On Shareholders. About.com Money. Retrieved 21 July 2015, from http://bizfinance.about.com/od/Basic-Financial-Management/a/what-is-shareholder-wealth-maximization.htm
Registered company Definition - NASDAQ.com. (n.d.). Retrieved from http://www.nasdaq.com/investing/glossary/r/registered-company
Small Business - Chron.com,. (2015). The Legal Differences Between Registered & Unregistered Holding Companies. Retrieved 21 July 2015, from http://smallbusiness.chron.com/legal-differences-between-registered-unregistered-holding-companies-31370.html
