As the strategic decision makers, managers are the role players that
determine the future pathway of the organization. Most of the companies today
are profit oriented organizations where each and every employee within that
business trying to maximize the revenue at any cost. Hence in determine the
profitability of the organization, increasing revenues to the business should
be more focused at the same priority of decreasing cost of overall where most
of the managers are not focused on.
Root of achieving this output can be found at objective setting
stage as most important cooperate objectives and then potential marketing
objectives too. Cooperate objectives are the key objective set by board level
of the organization that determines the overall direction of the company for
next few years. When formulating a plan for any purpose it is important that cooperate
management set their corporate objectives in line with the outcome envisages in
the plan. For instance, cooperate management may have a target for overall
profitability to a rise as a result of improving customer lifetime value and
However, different parties in the organization look on
objectives in different aspects according to their role where that is a
scenario that can be vulnerable to deviate the effort from achieving overall
objectives. This is where agency problem comes into play.
The agency problem is
a conflict of interest inherent in any association where one party is
expected to act in other party’s best interests. In corporate finance, the
agency problem typically refers to a conflict of interest between an
organization’s management and the organization’s stockholders. The manager,
performing as the agent for the shareholders where he is supposed to make judgments
that will exploit shareholder wealth even though it is in the
manager’s best interest to higher his own wealth. Moreover this agency problem
can be occurred between managers and stockholders as well as managers and
For example: a
principal would hire a plumber (agent) to fix plumbing issues where plumber’s
best interest is to create as much income as he can, he is given the
responsibility to perform in whatever situation results in the most benefit to
the principal. In that case managing each other’s objectives and their efforts
towards short term or long term results should be typically managed.
In any case this agency problem can’t be totally eliminated
whereas can be managed to a little extent by motivating managers to act in the
shareholders’ best interests through incentives such as performance-based
compensation, or the threat of firing and the threat of takeovers.
Rather, catering to these everyone’s aspects also should be a
priority whereas ultimate objective of those actions should lead towards
achieving cooperate objectives of the organization which will maximize both short
term profits as well as long term. Over emphasized on short term value at
expense of the long term interests of the company and its shareholders is risky
strategy that will not work at every organizations for positive outcome.
Optimally a balance should be maintained between short term and long term
objectives whereas it is not always possible indeed management interests and
considerable percentage of shareholders’ interests have to be considered also.
Dividend sharing is a key area that should be focused on
managing profits of the organization where it can be explained through an
example: a multinational company which is focusing on expanding to several new
areas must need financial allocations to create infrastructures, buy
machineries and other needs in constructing the base while allocating finance
for existing employees’ salaries and bonuses. This money should be allocated
from the company’s savings account which reduces the profits margins. But in
the perspective of shareholders, those profits are a share of shareholders too.
Sometimes managers are focus deliberately on short term best
strategies which can gain huge profits in a small time where it increases the
manager’s recognition within the business field. Many business projections are
being jeopardized because managers don’t have the company’s interests at heart
and will focus for short-term profits and disregard any negative long-term
effect to the company.
In context of stock levels, managers don’t usually focus on the
current stock value at high focus. Standard business thought is that when the
company is well run, the stock price will eventually reveal strong execution of
a sound business plan built on a solid business model. And company’s profit is
not necessarily tied to the value of its stock where it is much more difficult
than that. Managers shouldn’t pay much courtesy to stock value unless they own
stock in the company.
Several ways in which a company can show higher profit in short-term
at the cost of long-term performance are can be listed as examples: Cutting
down expenditure for R&D, cost cutting on investments, cutting down on
employee development and training activities, cutting down marketing costs and
sudden increase of price of products for short term higher gain etc.
Again if they need to see a better future, then managers must
look after their long term slow moving or fast moving strategies by investing
their hard earned money on it to gain long term higher gain. Though the payback
period is high on those leads and cost and profit ratio is highly debated,
focus on both short term and long term profits cannot be neglected. Otherwise
companies can lose money due to the constant changes.
In conclusion, it is acceptable in some cases that emphasizing
only on short term profits can lead to long term damage to the company’s
profitability whereas overall effect on the scenario must look after both short
and long term aspects for the company’s betterment.