Question

Conflict, so inevitable in operations of businesses, may emanate from decisions taken to run the course of business. This conflict is, almost and always, associated with issues concerning termism. For instance, profit maximisation, however measured, is usually seen as a short-term objective whereas wealth maximisation is a long-term objective. There can be a conflict between short-term and long-term performance. Thus, it is quite possible, for example, to maximise short-term profits at the expense of long-term profits.

Required:
(a) Briefly, discuss three ways managers of a business may increase short-term profits at the expense of long-term profits.
(b) Explain three instances where conflicts might occur between management and shareholders.
(c) Explain the term "Maximization of Shareholders’ Wealth" .

Answer 1

Managers can increase short-term profits at the expense of long-term profits by reducing research and development, underinvesting in infrastructure, and overemphasizing cost-cutting. Conflicts between management and shareholders can arise in relation to dividend policy, executive compensation, and mergers and acquisitions.

Step-by-step explanation:

Managers of a business may increase short-term profits at the expense of long-term profits in several ways:

1. Reducing research and development: By cutting investments in research and development, managers can reduce costs in the short-term. However, this may limit the ability of the business to innovate and compete in the long-term.
2. Underinvesting in infrastructure: Managers may delay or neglect investments in essential infrastructure, such as equipment or technology upgrades, to save costs in the short-term. This can lead to operational inefficiencies and hinder long-term growth.
3. Overemphasizing cost-cutting: Managers may focus solely on reducing costs, such as cutting employee benefits or reducing quality standards, to increase short-term profits. However, these actions can harm the business reputation and customer loyalty, affecting long-term profits.

Conflicts between management and shareholders can occur in various instances:

1. Dividend policy: Shareholders may expect higher dividend payouts, while management may prioritize reinvesting profits for future growth. This difference in objectives can lead to conflicts.
2. Executive compensation: Shareholders may object to excessive executive compensation packages, especially if they perceive it as not aligned with the company's financial performance.
3. Mergers and acquisitions: Shareholders may have differing opinions on potential mergers or acquisitions, which can lead to conflicts between management and shareholders.