As the strategic decision makers, managers are the role players thatdetermine the future pathway of the organization. Most of the companies todayare profit oriented organizations where each and every employee within thatbusiness trying to maximize the revenue at any cost. Hence in determine theprofitability of the organization, increasing revenues to the business shouldbe more focused at the same priority of decreasing cost of overall where mostof the managers are not focused on.
Root of achieving this output can be found at objective settingstage as most important cooperate objectives and then potential marketingobjectives too. Cooperate objectives are the key objective set by board levelof the organization that determines the overall direction of the company fornext few years. When formulating a plan for any purpose it is important that cooperatemanagement set their corporate objectives in line with the outcome envisages inthe plan. For instance, cooperate management may have a target for overallprofitability to a rise as a result of improving customer lifetime value andpositioning.However, different parties in the organization look onobjectives in different aspects according to their role where that is ascenario that can be vulnerable to deviate the effort from achieving overallobjectives. This is where agency problem comes into play.The agency problem isa conflict of interest inherent in any association where one party isexpected to act in other party’s best interests.
In corporate finance, theagency problem typically refers to a conflict of interest between anorganization’s management and the organization’s stockholders. The manager,performing as the agent for the shareholders where he is supposed to make judgmentsthat will exploit shareholder wealth even though it is in themanager’s best interest to higher his own wealth. Moreover this agency problemcan be occurred between managers and stockholders as well as managers andcreditors.For example: aprincipal would hire a plumber (agent) to fix plumbing issues where plumber’sbest interest is to create as much income as he can, he is given theresponsibility to perform in whatever situation results in the most benefit tothe principal. In that case managing each other’s objectives and their effortstowards short term or long term results should be typically managed.
In any case this agency problem can’t be totally eliminatedwhereas can be managed to a little extent by motivating managers to act in theshareholders’ best interests through incentives such as performance-basedcompensation, or the threat of firing and the threat of takeovers.Rather, catering to these everyone’s aspects also should be apriority whereas ultimate objective of those actions should lead towardsachieving cooperate objectives of the organization which will maximize both shortterm profits as well as long term. Over emphasized on short term value atexpense of the long term interests of the company and its shareholders is riskystrategy that will not work at every organizations for positive outcome.Optimally a balance should be maintained between short term and long termobjectives whereas it is not always possible indeed management interests andconsiderable percentage of shareholders’ interests have to be considered also.Dividend sharing is a key area that should be focused onmanaging profits of the organization where it can be explained through anexample: a multinational company which is focusing on expanding to several newareas must need financial allocations to create infrastructures, buymachineries and other needs in constructing the base while allocating financefor existing employees’ salaries and bonuses. This money should be allocatedfrom the company’s savings account which reduces the profits margins. But inthe perspective of shareholders, those profits are a share of shareholders too.
Sometimes managers are focus deliberately on short term beststrategies which can gain huge profits in a small time where it increases themanager’s recognition within the business field. Many business projections arebeing jeopardized because managers don’t have the company’s interests at heartand will focus for short-term profits and disregard any negative long-termeffect to the company.In context of stock levels, managers don’t usually focus on thecurrent stock value at high focus. Standard business thought is that when thecompany is well run, the stock price will eventually reveal strong execution ofa sound business plan built on a solid business model. And company’s profit isnot necessarily tied to the value of its stock where it is much more difficultthan that. Managers shouldn’t pay much courtesy to stock value unless they ownstock in the company.
Several ways in which a company can show higher profit in short-termat the cost of long-term performance are can be listed as examples: Cuttingdown expenditure for R&D, cost cutting on investments, cutting down onemployee development and training activities, cutting down marketing costs andsudden increase of price of products for short term higher gain etc.Again if they need to see a better future, then managers mustlook after their long term slow moving or fast moving strategies by investingtheir hard earned money on it to gain long term higher gain. Though the paybackperiod 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. Otherwisecompanies can lose money due to the constant changes.
In conclusion, it is acceptable in some cases that emphasizingonly on short term profits can lead to long term damage to the company’sprofitability whereas overall effect on the scenario must look after both shortand long term aspects for the company’s betterment.