Divorce of Ownership
4 (b) Evaluate the argument that managers controlling large companies might follow policies which do not necessarily maximise the profits of the owners.
There is a divorce of ownership is the difference between people who own the firm who are the shareholders, and the people who control the firm the managers. The shareholders are investors into the firm and want the firm to make a profit so they receive dividends which is a share of the profit, they want to maximise their dividends/profits. Managers work on behalf of the shareholders and are responsible for the running of the firm and they receive a wage/salary for doing this.
There are two types of profits; the first is normal profit which is the level of profit that is required to keep the owners/shareholders happy. The second is supernormal profit which is any additional profit on top of the normal profit.
An example of the managers not implementing policies to maximise policies is to sell products at just above cost price. The managers may have an objective to increase the brand image of the firm and maximise sales so that the firm can develop their brand image and be more recognisable. This may involve lowering prices and therefore the firm may not be increasing the added value per unit and improving the profits of but may help the manager’s objective of sales maximisation and could help the firm become recognisable. In the short run the firm may experience lower profits because of the cut in prices, but if the firm does achieve its aim of becoming well known and having a brand then they can increase their profits in the long run and therefore they can achieve the shareholders aim of maximising profits. So even though in the short run the aim is not to maximise profits it is in the long run
Another example of where managers and shareholders may have conflicting aims is the ethics of the firm. If managers decide that the firm should use ethically sourced products then it could mean that the cost of supplying
There is a divorce of ownership is the difference between people who own the firm who are the shareholders, and the people who control the firm the managers. The shareholders are investors into the firm and want the firm to make a profit so they receive dividends which is a share of the profit, they want to maximise their dividends/profits. Managers work on behalf of the shareholders and are responsible for the running of the firm and they receive a wage/salary for doing this.
There are two types of profits; the first is normal profit which is the level of profit that is required to keep the owners/shareholders happy. The second is supernormal profit which is any additional profit on top of the normal profit.
An example of the managers not implementing policies to maximise policies is to sell products at just above cost price. The managers may have an objective to increase the brand image of the firm and maximise sales so that the firm can develop their brand image and be more recognisable. This may involve lowering prices and therefore the firm may not be increasing the added value per unit and improving the profits of but may help the manager’s objective of sales maximisation and could help the firm become recognisable. In the short run the firm may experience lower profits because of the cut in prices, but if the firm does achieve its aim of becoming well known and having a brand then they can increase their profits in the long run and therefore they can achieve the shareholders aim of maximising profits. So even though in the short run the aim is not to maximise profits it is in the long run
Another example of where managers and shareholders may have conflicting aims is the ethics of the firm. If managers decide that the firm should use ethically sourced products then it could mean that the cost of supplying