Stockholder and Management interest and Application of Concepts/Time Value of Money

Part 1: Stockholder and Management interest

Stockholders and managers do share a common interest, improvement of the company in some fashion. However, those improvements can differ from being an overall improvement of the company or an improvement just for a certain aspect of the company. According to the article “Goals of Managers & Stockholders” by Wendel Clark, stockholders have one main goal: increasing the value of the company (Clark, 2020). This goal of the stockholder can be an increased stock price, profitability or market share (Clark, 2020). The stockholders’ goals are set by the board of directors as a whole but those directors are selected by the stockholders (Clark, 2020). As for the mangers’ goals, they will have more specific goals such as sales level, customer satisfaction or increased market share. So, the goals of the stockholders and managers share a common interest in improving the company but just a different aspect.

I don’t have any direct experience with CEO excesses or outlandish spending on events or things that definitely do not help the overall goal of stockholder wealth maximization, but I did research two such events. One event where this happened was when Chesapeake Energy CEO, Aubrey McClendon, spent $5.9 million of the company’s money to purchase tickets to the Oklahoma City Thunder’s basketball games (McMaken, 2011). Another instant such as that, CEO Martha Stewart earned $2 million by selling exclusive rights to “film and produce” her TV show to her own company (McMaken, 2011).

In order to align the goals of both stockholders and managers, the simplest way is to pay managers partially in stock (Clark, 2020). Making managers stockholders will give them interest in seeing the company succeed and grow (Clark, 2020). Also, stockholders can set specific goals and provide bonuses for meeting the goals (Clark, 2020). These two examples will help align the goals of the stockholders and managers. Additionally, the stockholders could hire outside consultants to monitor and evaluate the work of the managers and their performance.

Part 2: Application of Concepts/Time Value of Money

The time value of money is an essential aspect of managing financial decisions. There is a saying “A bird in the hand, is worth two in the bush”. The money a company has now can have a high future value or low value, it all depends on how the money is invested and the interest rate. This knowledge is important because in a business, you have to decide whether to buy a new piece of equipment which will help bring increased revenue in the future (Compton, 2012). The time value of that investment could be an important issue in the future. It is wise to research and determine the risk/reward of making an investment.

References

Clark, W. (2016, October 26). Goals of Managers & Stockholders. Retrieved May 19, 2020, from https://smallbusiness.chron.com/goals-managers-stockholders-39185.html

McMaken, L. (2011, August 19). 5 Outrageous CEO Spending Abuses And Perks. Retrieved May 19, 2020, from https://www.forbes.com/sites/investopedia/2011/08/03/5-outrageous-ceo-spending-abuses-and-perks/#67ee9c953ae2

Star, D. C. T. M. (2012, December 30). Understand the time value of money in making decisions. Retrieved May 19, 2020, from https://www.meridianstar.com/news/business/understand-the-time-value-of-money-in-making-decisions/article_7b289db8-e6bf-55c5-a0f2-93abe121f9ef.html

Part 1

In my personal experience working as a tech/physical therapy assistant for a physical therapy office five years ago, the owner/manager of the business was making financial decisions that benefitted herself rather than the whole company. This ultimately led to the demise and closure of this business, which occurred about a year after my time there. There were many clients that received physical therapy and rehabilitation treatments from this physical therapy practice, but the owner was simply trying to make as much personal profit as possible while not considering the long-term effects on both the business and its individual clients. The decision-making of the owner of this business was not aligned with that of the shareholders whatsoever, and it eventually led to a negative outcome for both parties.

One motivational tool that can be used to align management and stockholder interests would be to pay managers of a company partially in stock, which turns the managers into stockholders giving them a desire to make the company succeed (Clark, 2020). This tool can also be taken further in the contract negotiation process. A company looking to hire a new Corporate Executive Officer (CEO) could offer them some of their proposed salary in stock, possibly a higher amount than expected, but the company could place the stock in a five or ten-year trust to ensure that the new CEO does not opt out early with the stock and leave the company (Zeev-Ben-Mordehai, 2010). These two tools both have a direct practical impact in that better management is a result of these strategies. The CEO or manager being hired is now much more dedicated to the long-term success of his or her company because it also directly affects his or her success.

Part 2

Time Value of Money concepts are very important in managerial decision making for both the business and its shareholders. Management must consider interest rates whether simple or compounding for both investing and financing activities. Compounding interest is the type to stay away from when financing an activity if  possible (Subjectmoney, 2014). Understanding the concepts of time value of money can determine short-term success and long-term success, and all too often it ends up being financially profitable in the short-term but harmful in the long-term when people make decisions in these areas. Management can use time value of money concepts to determine if current spending is worth a possible lower future net worth or not (Friedberg, n.d.). Time value of money concepts should be the basis for all managerial financial decision-making.

Clark, W. (2020). “Goals of Managers & Stockholders.” Chron. Retrieved from: https://smallbusiness.chron.com/goals-managers-stockholders-39185.html

Friedberg, B. (n.d.). “Time Value of Money in Financial Decision Making Leads to Greater Wealth.” Retrieved from: https://barbarafriedbergpersonalfinance.com/mba-class-time-value-of-money-financial-decision-making/

Subjectmoney. (2014). Time Value of Money | TVM Lesson. Retrieved from: https://youtu.be/m3azU7gYHc0

Zeev-Ben-Mordehai, O. (2010). “Aligning the CEO interests with the Shareholders interests.” Management innovation exchange. Retrieved from: https://www.managementexchange.com/hack/aligning-ceo-interests-shareholders-interests