Should companies put shareholders or employees first?
Shareholders often enjoy hearing companies mentioning the words “return to shareholders”. This is especially true for long-term investors (as compared to daily punters) who want good returns on their investment, whether in terms of dividends or higher share prices.
It makes sense, since a public company is at least partially owned by the public.
As quoted in an article on The Motley Fool, “the main reason you exist...is to serve the interests of those who own you”.
But if caught between shareholder and employee wants, to which would you lend your support?
Let us take a look at each group.
If a company put shareholders first, it may be pushed to expand and drive productivity. This would, in turn, drive employees to the max in terms of workload. And at minimum wage too.
They want what makes most economic sense to the company, factoring in growth and expansion.
Now if employees were put first, things would be very different. Management would want to keep good employees by offering them higher wages and reasonable working hours. They would also leave layoffs as an absolute last resort.
An example of a company offering lifetime employment is Nasdaq-listed Lincoln Electric. It pays high wages and sells goods at low selling prices, but also has high productivity. How, you ask, can such a company be profitable?
Well, it can and has to be, since it's been around for about 107 years.
So employees would want to be well taken care of, which, in the minds of shareholders, may not reap as much returns as they'd like.
Of course, one would think this conflict could be mitigated if employees were shareholders as well. After all, they would then be accountable to themselves.
Contrary to that belief, research shows employee ownership may, sometimes, be counterproductive.
According to an article on MIT Sloan Management Review, employees' “interest in the company's future is typically dwarfed by day-to-day concerns, such as ensuring that their jobs remain secure and their wages are paid”.
Such employee shareholders also “tend to to favor low-risk strategies that generate stable cash flows over riskier projects that could generate greater profitability and growth”.
Add to that the inertia of investing in productivity-enhancing equipment which might potentially make their jobs obsolete.
So who should a company put first?
It is probably clichéd, but they should focus on both.
It is not impossible to set up employee-friendly policies and have them work in an environment that will boost shareholder value as well.
Please offer us your take on the matter.
Serene Lim
It makes sense, since a public company is at least partially owned by the public.
As quoted in an article on The Motley Fool, “the main reason you exist...is to serve the interests of those who own you”.
But if caught between shareholder and employee wants, to which would you lend your support?
Let us take a look at each group.
If a company put shareholders first, it may be pushed to expand and drive productivity. This would, in turn, drive employees to the max in terms of workload. And at minimum wage too.
They want what makes most economic sense to the company, factoring in growth and expansion.
Now if employees were put first, things would be very different. Management would want to keep good employees by offering them higher wages and reasonable working hours. They would also leave layoffs as an absolute last resort.
An example of a company offering lifetime employment is Nasdaq-listed Lincoln Electric. It pays high wages and sells goods at low selling prices, but also has high productivity. How, you ask, can such a company be profitable?
Well, it can and has to be, since it's been around for about 107 years.
So employees would want to be well taken care of, which, in the minds of shareholders, may not reap as much returns as they'd like.
Of course, one would think this conflict could be mitigated if employees were shareholders as well. After all, they would then be accountable to themselves.
Contrary to that belief, research shows employee ownership may, sometimes, be counterproductive.
According to an article on MIT Sloan Management Review, employees' “interest in the company's future is typically dwarfed by day-to-day concerns, such as ensuring that their jobs remain secure and their wages are paid”.
Such employee shareholders also “tend to to favor low-risk strategies that generate stable cash flows over riskier projects that could generate greater profitability and growth”.
Add to that the inertia of investing in productivity-enhancing equipment which might potentially make their jobs obsolete.
So who should a company put first?
It is probably clichéd, but they should focus on both.
It is not impossible to set up employee-friendly policies and have them work in an environment that will boost shareholder value as well.
Please offer us your take on the matter.
Serene Lim
Labels: employees, management, shareholders
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Maintaining loyal and productive employees is a form of investment for companies. A company would have difficulty maintaining good returns for shareholders over the long term if it keeps losing good employees.
In that sense, your question is akin to asking whether companies should focus on long-term or short-term concerns.
In that sense, your question is akin to asking whether companies should focus on long-term or short-term concerns.
Thanks for your comment, Lim. =)
From my understanding, employee and shareholder satisfaction are both things that public companies have to grapple with all the time.
Both should be of utmost concern because without the support of one, the company would have a hard time existing, let alone moving forward.
Perhaps you could help me understand what you mean when you say "long-term or short-term concerns". =)
From my understanding, employee and shareholder satisfaction are both things that public companies have to grapple with all the time.
Both should be of utmost concern because without the support of one, the company would have a hard time existing, let alone moving forward.
Perhaps you could help me understand what you mean when you say "long-term or short-term concerns". =)
As you mentioned in your post, if a company puts shareholders first, it may drive employees to take on higher workloads at low wages. That gets higher profits for the company over the short term.
Over the long term, however, it may demoralise employees, leading to disengaged workers and low productivity. It may even drive them away. Since recruitment and training are often significant costs for companies, a high turnover lowers long term returns for the company.
So what boosts short term returns in this case could have adverse impact on returns over the long term, which obviously is not good for shareholders either.
The trick, as you alluded to, is to find some sort of balance.
Hope this clarifies.
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Over the long term, however, it may demoralise employees, leading to disengaged workers and low productivity. It may even drive them away. Since recruitment and training are often significant costs for companies, a high turnover lowers long term returns for the company.
So what boosts short term returns in this case could have adverse impact on returns over the long term, which obviously is not good for shareholders either.
The trick, as you alluded to, is to find some sort of balance.
Hope this clarifies.
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