Under the concept of corporate social responsibility, an organization should also take the expectations of its various stakeholders into account. It is suggested that the organizations success will depend on satisfying all of these. The stakeholders in an organization include its shareholders, customers, suppliers, lenders and employees, as well as the government. The interests and expectations of these stakeholders are widespread. A shareholder for instance will be concerned about the return on his investment and will thus be looking for a high level of dividend payments and a growth in share price. A customer will be interested in competitive prices, quality of the company’s products and customer service, while an employee will seek fair remuneration and good working conditions. The organization must therefore decide, which stakeholders’ interests it will honor, when setting its objectives. The degree to which stakeholders’ expectations are taken into account will usually depend on the level of which the organization is effected by their approval or disapproval of its action.
The shareholders effectively own an organization, thus their expectations are likely to be considered. Within a public limited company there can be said to be a principal-agent agent set up. The management acts as an agent on behalf of the shareholders as a principal. This implies that the management will pursue the interests of the shareholders and thus seek to maximize the return on their investment by maximizing profits and issuing high dividends. As discussed earlier, short-term profits are lessened by investment for future returns. While some individual shareholders may be taking a long-term view, financial institutions often have large shareholdings in an organization. These do not usually hold specific shares for a long time and they are looking for a worthwhile return in the short-term. If these returns cannot be expected within a limited time period, they will sell quickly, rather than hold.
This creates a first area of conflict. To fully satisfy the owners of their organization in the present, managers would have to sacrifice investment in securing future operations and assuring a long-term consistency in trading results in favor of short-term profits. It also means that any profits should be distributed as dividends. Obviously, such conduct is not sustainable and thus a balance must be sought between the long-term interests of the organization itself and the short-term interests of its owners. Inconsistency in trading and lack of future prospects will make the acquisition of shares in that company less attractive, thus resulting in a lower share price. Low levels of dividends mean a low return on the initial investment and shareholders will seek to sell their stake in the organization, again causing share prices to fall. It must be noted at this point that a low share price invites takeovers by other organizations or individuals, especially where such valuation is below the company’s assets. For the management this is an undesirable outcome, as both, the integration into another company or conglomerate and the sole ownership will usually involve a change in strategy, often helped by the appointment of a new management team. Sometimes, the purchaser might choose to split up the company or liquidize its assets to maximize the short-term financial gain. An organization must thus be careful to be able to issue sufficiently high dividends to make it attractive to hold their shares, whilst investing enough to sustain or increase their profitability.
A conflict can already be identified at this level, whilst assuming that the manager will in fact identify with the organization he represents and acting to achieve the best possible outcome for the organization in the long-term and the shareholder in the short-term. According to Simon, however, the reality often sees managers pursuing their individual goals instead. They seek to “maximize their own utility”. This means that they are concerned about their remuneration, work situation, power and status, before considering organizational welfare. Simon suggests that a manager will seek to satisfice the owner of the organization, but do no more than that. He will aim to achieve a level of profits that the shareholder will be satisfied with and invest enough to create optimism about the company’s future, but then pursue his own interests. Where trading results are promising and satisfactory levels are met, the management is unlikely to disturb investors by such behavior, as these are concerned with achieving a worthwhile financial return on their investment. It may prove problematic though, when sales or profits fall, be it due to strategic weaknesses of the company, a downturn in the market as a whole or even economic slowdown in general. Within a public limited company, another issue linked into this is that the directors of a company issue their own pay rises, which means that this is not necessarily linked to their actual performance. Recently, there has been an increase in action taken by shareholders in the form of exercise of their right to veto.
Both Selfridges and New Look have been bought out and some of the events leading up to these buy-outs can be directly linked to the conflict between the managers and owners objectives of these two companies. Both companies are High Street retailers, though their approach largely differs. Selfridges currently operates four stores in the UK, where it offers a large range of quality branded goods, including clothing, accessories, home wares, restaurants and even a hotel. It stocks many designer labels. Selfridges occupies prime locations and seeks to create customer experiences, rather than offer a place to shop. It has thus positioned itself as a premium brand. New Look offers women’s clothing at competitive prices in 500 outlets in the UK and a further 191 in France. It has only recently extended its product line to include menswear and childrenswear. As an economy brand, New Look operates in the fastest growing sector of UK clothes retailing.
In both cases, a fall in sales resulted in an initial fall in share prices. With regards to Selfridges, this has been linked to the general economic slowdown causing customers to switch to cheaper alternatives. Trading at its Oxford Street Store in London has further been effected by the temporary closure of the London Underground decreasing its accessibility. A large part of the decrease in sales was thus beyond the managements’ control, it nevertheless effected investors faith in the shares and therefore its valuation on the stock market. New Look’s sales went down in spring 2003, when the articles stocked did not allow for a high mark-up and due to their nature many had to be further discounted. The retail chain was criticized for misjudging a fashion trend. When this lead New Looks Chief Executive to announce that the company had to lower its profit predictions, the share price plummeted. Both companies were at the time of those events involved in an expansion program. Selfridges was redeveloping its Manchester store and planning to open a further four stores across the UK, while New Look introduced new product lines, started the relocation and refurbishment of its stores to achieve space growth of 200,000 square feet during 2003 and also planned to enter the Irish market. As consistency is of prime importance, abandoning those plans was not an option. Poor trading results can be temporary and the fact that both companies pushed for the progress of their projects indicates that the management evaluated their situation as such. They showed optimism in the return on their investments. The fall in share prices, however, shows that shareholders did not share that optimism, or at least were not willing to wait for the results. Especially New Looks £3 million development of an unconventional flag-ship store in London’s Oxford Street was seen as a high risk investment, as it will need to take £12 million a year to justify its cost. It was the largest retail investment since Selfridges’ store redevelopment in 1999.
The low share price opened the door to a potential take-over and both, Selfridges’ and New Look’s shares rose, when rumors of a potential buy-out started. At this point, strategy may be insufficient explanation for the reaction of the stock market. In the buy-out situation, short-term profits can often be made, as an offer will usually be above the current share price. This also explains that New Look’s valuation decreased again, when it was feared that Mr. Singh’s formal bid may be abandoned. In the case of New Look it must also be considered that it was the original founder that bought back ‘his’ company. The stock market it generally wary of such a buy-back, as it often indicates hidden financial value in a company.
Shortly after the initial rumors, but despite the fall in sales, New Look’s Directors issued themselves 100% bonuses. The disapproval of this was shown by a sharp drop in share price. When the bid took shape, the company’s chief executive, Stephen Sunnucks, was quick to announce that he would not be willing to continue his current role should the bid succeed. This may indicate that he does not wish to work under Mr. Singh, and his statement that he was looking for a more hands-on role is a sign for his dislike of loss of power and status. Similarly, Selfridges’ chief executive, Peter Williams, resigned shortly after the buy-out, stating that he was more suited to work in the public arena, though he took a more co-operative approach in overseeing the transition and parting on friendly terms, as made clear by positive comments by the new owner. In the case of Selfridges, the loss of managers’ power to act in their own interest was made obvious by the appointment of a management team overseeing all of the new owners’, Galen Weston’s, businesses and the abandoning of large parts of the company’s expansion plans.
Both examples show that it is essential for a company to reach expected levels of profits for its owners. Investment, though necessary to sustain consistent profits in the long term are a risk in the short term and must be communicated well to the company’s shareholders. A drop in sales will make investment less attractive, whereby it is not always relevant, how that fall is caused. It must be carefully assessed, which stakeholders interests to focus on. A failure to achieve a balance between investment and short-term profits may lead to a take over, which may mean the loss of power or even position for the managers. While the pursuit of individual goals is often the reality for managers, this can cause problems for the company, when trading becomes more difficult. The means of influence over management decisions for an owner of a public limited company are limited, however, where objectives are too wide apart, the effect of his disapproval will be wide reaching.
the appointment, 14th Feb. 2004
