Conflict between Imposed Government Regulations and Maximization of Shareholders Wealth
Introduction
The business environment has undergone remarkable changes in terms of structural adjustments to match the evolving nature of business processes. This has been ultimately accelerated by the advent of economic integration and globalization that has infused an advanced level of rivalry among trading competitors (Broadman, Tiiu & Paul, 2005). Consequently, the marketing element has shifted from a product to a customer-centric strategy that has prioritized consumer need in the production process. As all organizations align to their business processes to this strategy, innovation serves as the only tool against the enhanced trade rivalry as it creates a competitive advantage. Current economic liberation is geared towards the creation of free markets for enhanced consumer and shareholder welfare, but a level of regulation is still maintained by the government for consumer safeguard against market imperfections.
Types of Government Regulations
The framework of government regulations from the past and present periods has been enforced through business and commercial laws for the creation of a fair trade environment among the producers and the end users (Machan, 2007). Broadly, government regulations fall under the general and specific categorizations with the former being applied to all forms of businesses while the latter encompass specific laws that are accorded with regard to industrial sectors. For instance, the Internal Revenue Code pertains to all trading organizations as accorded by the fiscal policies. These general statutes mainly regulate competition, labor regulations with regard to employment and environmental guidelines regarding pollution and effluent management. The Federal Communications Commission imposes statutes on the media industry and this is an example of a specific regulation. Regardless of regulation nature, these business controllers have had a considerable impact on shareholder wealth attributed to the direct and indirect overheads created in the process.
Company Objectives
Businesses are established with the imperative duty of profit maximization. A complementary relationship exists between business expenditures and the level of revenues such that, high costs result to low profit margins whereas decreased costs lead to high profit creation. The management team bears the mandate of ensuring low cost realizations on business processes and production resources for optimal revenues and profits. Shareholders being business investors are driven by the profit principle as a reward for their capital and the risk attached to funding. Shareholders wealth is measured in terms of the market price of equity, a reflective figure on the projected cash flows to a given investment. This figure, generally referred to as the dividend, is computed by multiplying the amount of earnings per share (EPS) and the total numbers of shares within the company.
A company therefore bears the objective of maximizing the shareholders wealth as the profit return. Managerial focus therefore aims at ensuring optimal returns on the shares are acquired for purposes of wealth maximization. Government regulations increase the costs attached to businesses and consequently enhance the trade burdens that bear an adverse effect on shareholders wealth (Moyer, James & William, 2008). The EPS value has to be subjected to the period accorded to the investment, the dividend strategy adopted by an organization, the level of economic risk and the investment portfolio maintained by the organization.
Conflict between Government Regulations and Shareholders Wealth
A majority of scholars argue that government regulations accord negative pressure on the shareholder wealth within the short-term period while others assert that view that effectual government regulation in the long-term period has a positive impact on the shareholder wealth (Ferrell, John & Linda, 2009). The latter view is supported by the philosophy of social responsibility that ensures the creation and maintenance of market share based on the customer loyalty and consequently a sustainable market that ensures a steady flow of shareholder wealth. These two perspectives have created a point of conflict in business organizations as to whether government regulations are a positive or negative element in the realization of shareholders assets maximization. Government regulations are highly costly in nature to business settings especially small and medium-sized enterprises (SMEs). Note that, trade tariffs are considered as direct business costs as they reflect a proportionate monetary need that towards an organizations. Indirect overheads infused on businesses by government regulation are termed as hidden costs that impose “a relatively heavy burden on medium and small sized businesses,” (Nijsen, John & Christoph, 2008, p. xii).
Hidden overheads as opposed to direct costs are regressive in nature and this affects the distributive ability of ensuring business equity among competitors. Horizontal equity is maintained in business organizations that fall within the same earning level as low, medium or high earners. Earnings are computed in terms of revenue flows with low earners having the least amount of cash flows and consequently yielding low profit margins. Horizontal equity is achieved across the various earning groups in terms of tax burdens as proportionate standards are maintained through fixed tariff policies. For instance, a small business may be worth one hundred thousand dollars while a large corporation may be valued at one million dollars. Charging a fixed amount of taxes say twenty percent on the value of a business ensures that the tax burden is equitably distributed among the business organizations (Ferrell, et al., 2009). Referring to our example, the small business would only remit twenty thousand dollars in taxes whereas the large corporation would be charged two hundred thousand dollars.
Regressive policies however affect the horizontal equity and thereby accord a higher business cost to lower earning businesses. Administration overheads are the most notable regressive cost that businesses face. Sole proprietorships tend to be the most negatively affected followed by small and medium establishments respectively. Within the period 2000, researches conducted in Dutch revealed that small business settings having not more than nine employees bore a higher hidden cost in terms of administrative overheads constituting to 9.5 percent. Contrastingly, larger organizations handling at least one hundred employees only bore 1.1 percent of the additional overheads created by government policies (Nijsen, et al., 2008). On an international front, the economic mainstay comprises of small businesses due to the ease of setting and capital base required. The heath care reform regulation adopted in America provides a good illustration of such costs and the lack of distributive equity leading to the creation of a monetary burden to small organizations.
In the year 2006, ninety-six percent of the US citizens were employed in small businesses from the total organizations in the nation, and this constituted to twenty-eight percent of the workforce (Council of Economic Advisers, 2009). The costs attached to the provision of health cover on employees has however been very high on small businesses being measured as being eighteen percent higher than what large companies incur in the provision of the mandated health cover on their workforce. This phenomenon has been attributed to hidden overheads in brokerage charges, a complementary figure to the health policy requirement. Small enterprises have had to bear up to ten percent of the same in periods where inflation has been notably high, although normally the charges range between two percent and eight percent. Compared to the large corporations, this charge has been found to be grater. Second, the administration costs of the health service have been very heavy on small organizations due to the economies of scale. Note that administration charges are usually fixed and regardless of the company size, all business settings have to meet the same costs, a reflection of vertical inequity.
The research indicates that large corporations realized lower costs overheads per individual due to the enhanced allocation power; the small businesses exceeded the cost incurred by large organizations on individual employee terms by three times (Council of Economic Advisers, 2009). Additionally, the health care requirement is discriminative in nature as evidenced by the rule of adverse selection based on the assumption that employees from small firms have a higher probability of claiming medical cover insurance when compared to those in large companies. This supposition leads to an allocation of higher insurance costs to small enterprises. These additional costs enforced by government regulations have negatively influenced the ability of setting up SMEs in terms of the additional costs that would easily have been overcome had the policy been well appraised in terms of cost-benefit analysis. Being a legal requirement, all businesses lacking such financial base is ultimately inhibited form operation. In 2002, fifty-eight percent of small businesses were able to comply with the regulation and this has reduced to forty-nine percent as noted in 2008 marking a considerable increase in the unemployment rate (Council of Economic Advisers, 2009).
With such costs, the level of shareholders wealth is drastically reduced and on the extreme, it would lead to business closure. The shareholder would lose the initial capital of investment and the fixed costs attached to factors like rent. The opportunity cost of attached to the business venture would also be high in terms of the period allocated in business operations and the foregone investments that the shareholder rejected for the corporation. Economic analysts have actively condemned such regulations by the assertion that most policies are affected by personal perspectives from the politicians. This claim is advanced from the perspective that government regulations are adopted and implemented by leader in the political capacity (Machan, 2007). The inclusion of personal views and perspectives in the creation of economic policies tends to discredit professional advice for personal gain in politics. For business organizations that are able to bear the additional overheads, the elevated cost level leads to low profits and this in turn affects the shareholders wealth negatively.
The company management is therefore faced wit a considerable challenge in balancing between shareholders needs and the regulatory needs geared towards social responsibility for enhanced communal welfare. Large organizations especially those dealing with business processes that lead to effluent production like chemical manufacturing plants and environmental degradation like mining activities have noted a sharp increase in their cost level structures. Environmental regulations levied on such industry players, as fuelled by the advent of global warming that has raised a considerable level of interest on lobby groups (society) and the government has led to the allocation of high pollution tariffs in a bid to minimize harmful ecological impacts (Ferrell, et al., 2009). The higher the level of pollutants in the environment, the graver the effects are. Therefore, with the inclusion of very high compensation costs, it means that business organizations have to reduce their production to maintain their current cost structures of incur higher costs for increased production. The latter strategy would mean lower profits due to the enhanced costs and consequently low shareholders wealth.
With the production process being very costly, the level of competitive edge is clearly affected, as rivals tend to use a lower pricing level for their products that cannot compete with the costly ones. The adoption of inflexible environmental policies has affected trading activities in the US as noted by the reduced number of jobs in the manufacturing sector by five million and ninety thousand employments lost slots (Luria, 2007). This has affected the level of exports in the nation especially noted in the medical industry as regulated by the Food and Drugs Agency (Weiss, 2007). The time taken for compliance of government regulations is also costly to a business organization both in terms of direct and indirect overheads. Competition for market shares has made it almost impossible for organizations to allocate the extra costs on the society because of the availability of superior yet affordable substitute products. Customers would therefore incur fewer costs in product switching and this makes it very easy for a company to lose its business and market shares leading to low shareholders wealth. Decreased shareholder returns threaten business continuity, as the owners may prefer investing in other profitable companies leading to the creation of unemployment.
Is Shareholder Wealth Maximization a Realistic Goal?
With the considerable constraint infused the hidden and direct costs with regard to government regulations, shareholder wealth can only be pragmatically realized through the reduction of costs attached to the rest of the stakeholders within a given company (Phillips, 2003). These include employees, suppliers, competitors and the society. Employees constitute to the labor resource in a business organization. Costs effectuality is determined by the proper allocation of business resources for optimal business solutions. Disguised unemployment acts as a large constraint within a company where labor is allocated ineffectually due to many employees. For instance, a job that can be executed by two people maybe spread over five employees. In this case, only two of the workers are actually employed, the rest constitute to disguised employment. Consequently, the company will incur an inflated budget in terms of salaries leading to ineffectual business operations (high operational overheads) and low shareholder wealth. It is therefore imperative for the management team to ensure that all resources are optimally allocated so that extra costs can be averted into other productive activities.
Suppliers also play a significant role in the enhancement of shareholders wealth. Procurements are purchased from trade merchants and the management should ensure proper research is conducted regarding the selling prices to ensure that resources are acquired at the lowest possible rates to reduce the overheads (Heath & Wayne, 2004). Research and development should also be conducted for factors such as transport and allocation economics to ensure that the least cost is met with regard to the societal distribution needs. This overcomes the problem of shortage or oversupply that is very costly for the firm. In turn, it enhances the business’ competitive edge over its rivals by the use of low priced yet superior products that ensure a high number of sales and profits. In conclusion, although government regulations are costly for business organization, shareholders wealth is a rational objective by focusing on the stakeholder component of business settings.
References:
Broadman, H. G., Tiiu, P., & Paul, J. J. W. (2005). Economic liberalization and integration policy: options for Eastern Europe and Russia. Berlin, Germany: Birkhauser.
Council of Economic Advisers. (2009). The Economic Effects of Health Care Reform on Small Businesses and their Employees. Executive Office of the President of the United States. Retrieved from http://www.whitehouse.gov/assets/documents/CEA-smallbusiness-july24.pdf
Ferrell, O. C., John, F., & Linda, F. (2009). Business Ethics: Ethical Decision Making and Cases. Independence, KY: Cengage Learning.
Heath, J., & Wayne, N. (2004). Stakeholder Theory, Corporate Governance and Public Management: What can the history of state-run enterprises teach us in the post-Enron era? Journal of Business Ethics, 53, 247-265.
Luria, Daniel. (2007). Is Manufacturing in the United States Toast? Manufacturing and Technology News, 14(18), 1-5.
Machan, T. R. (2007). The morality of business: a profession for human wealthcare. New York, NY: Springer.
Moyer, R. C., James, R. M., & William, J. K. (2008). Contemporary Financial Management. Stamford, CT: Cengage Learning.
Nijsen, A., John, H., & Christoph, M. (2008). Business regulation and public policy: the costs and benefits of compliance.New York, NY: Springer.
Phillips, R. (2003). Stakeholder theory and organizational ethics. San Francisco, CA: Berrett-Koehler Publishers.
Weiss, K. D. (2007). Building an import/export business. Hoboken, NJ: John Wiley and Sons.
Last Completed Projects
| topic title | academic level | Writer | delivered |
|---|