The Disadvantages of Stockholders Making Decisions for a Company
Because shareholders essentially own a company, they make important decisions regarding company management and proposed company changes. Shareholders have a lot of power within a company and sometimes push company management to make decisions against the interest of employees, customers or the company itself. Shareholders want to make decisions that will benefit the company’s overall value and therefore increase shareholder wealth.
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Shareholder Power
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Shareholders do not wield the authority to force company management to act. Shareholders do, though, have the power to vote on a company’s directors and major changes within a company, but they do not have the power to make company management go in one direction or another. Shareholders do have, however, the power to sway company management in the direction of their choosing, because shareholders can effectively fire company directors. So while shareholders do not make decisions for a company, aside from voting on certain changes, they can influence outcomes.
Employee Relations
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Since shareholders want to find ways to increase their wealth by making the company more valuable, they may urge the company to make decisions that increase sales or save money but harm employee relations. Anything a company does that takes away from employees will naturally lower morale and motivation in the workplace, but could cause the company’s revenue or net profit to increase. Shareholders are aware of a company’s larger issues, but often remain in the dark when it comes to employee satisfaction. By influencing company management to increase sales or profit in spite of employee relations, shareholders can create a poor company image to current and future employees, leading to attrition and poor production.
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Poor Quality
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One way to increase shareholder wealth is by increasing the speed at which a company delivers its products. This doesn’t apply to all companies, only those that develop new products and services, such as video game companies and TV developers. Shareholders believe – and rightfully so – that the public wants the newest and best product or service as soon as possible. But by forcing a company to speed up its development process, shareholders can cause new products and services to be of lesser quality than previous products and services, due to a focus on quantity rather than quality. Take, for example, a video game company that only creates one to two games per year, but ensures each game is well-polished. If that company is bought by a larger company whose shareholders focus on pumping out as many games as possible, the company that made one to two games per year may now make five to 10, but at a significantly lesser quality.
Perception
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A person's perception of a company often dictates that company's success. Shareholders who demand the company increase profits through both acceptable and cutthroat changes may damage the company’s reputation. For example, a large retail chain store may suffer from poor public perception because it pays its employees poorly, cuts back on the number of people it employees and overtakes small businesses in a community in attempt to increase profits and destroy competition.
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