Analyse reasons why changing a business’ objectives might affect its shareholders.
CAMBRIDGE
A level and AS level
Year Examined
February/March 2023
Topic
Strategic Management
👑Complete Model Essay
Analysing the Impact of Changing Business Objectives on Shareholders
Shareholders invest in businesses with the expectation of financial returns. Consequently, any shift in a business's objectives can significantly impact their interests. While some changes might be welcomed, others can lead to conflict and dissatisfaction. This essay will analyse how a change in business objectives, specifically a shift towards Corporate Social Responsibility (CSR), can affect shareholders.
Understanding Shareholder Interests
Shareholders are primarily concerned with maximizing their return on investment. This typically translates to increased profits, higher dividends, and a rise in share value. Any business decision that potentially threatens these financial interests is likely to be met with resistance.
The Shift Towards Corporate Social Responsibility
In recent years, there's been a growing focus on CSR. Businesses are increasingly expected to go beyond simply making profits and consider their social and environmental impact. This might involve initiatives like reducing their carbon footprint, engaging in ethical sourcing, or supporting local communities. While laudable, these initiatives often require significant investment and may not directly translate into increased profits, at least in the short term.
Conflicting Interests and Potential for Disagreement
The shift towards CSR can create a conflict of interest between a business and its shareholders. Some investors, particularly institutional investors focused on short-term gains, might view CSR initiatives as detrimental to profitability. They might argue that such expenditures reduce potential dividends or divert resources away from core business activities.
For instance, a company deciding to switch to sustainable but more expensive raw materials might experience a decrease in profit margins. This could lead to lower dividends for shareholders, causing dissatisfaction and potentially even a drop in share price. Shareholders might express their concerns through various channels, including voting against the proposed changes at the Annual General Meeting (AGM) or even selling off their shares.
Long-Term Vision Versus Short-Term Gains
However, it's important to acknowledge that not all shareholders oppose CSR. Some, particularly ethical investors and those with a long-term vision, understand the value of sustainability and positive social impact. They believe that a good CSR track record can enhance brand reputation, attract conscientious customers, and contribute to long-term shareholder value.
For example, a clothing company adopting ethical labor practices might see an increase in demand from consumers who prioritize sustainability, potentially leading to higher sales and profits in the long run. This demonstrates how aligning business objectives with broader societal values can ultimately benefit both the company and its shareholders.
Conclusion
Changing business objectives, particularly towards a greater emphasis on CSR, can have a multifaceted impact on shareholders. While some might view it as a detriment to profit maximization, others recognize its long-term value and potential to enhance brand reputation and shareholder value. Ultimately, the key lies in finding a balance between fulfilling the business’s social responsibilities and ensuring sustainable financial performance to satisfy the diverse interests of its shareholders.
Analyse reasons why changing a business’ objectives might affect its shareholders.
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Understanding the Essay Question
This A-Level Business Studies essay requires you to analyze the relationship between a business's objectives and its shareholders. Specifically, you need to explore how changing a business's objectives might affect different shareholders in various ways. You can choose to focus on **one specific changed objective** to illustrate your analysis.
Key Concepts
Business Objectives
Business objectives are the targets or goals that a company aims to achieve. Common examples include:
- Profit Maximization: Generating the highest possible profits.
- Growth: Expanding the business's market share and reach.
- Survival: Ensuring the continued existence of the company.
- Social Responsibility: Operating ethically and contributing to society.
- Employee Satisfaction: Creating a positive work environment for employees.
Shareholders
Shareholders are individuals or entities who own shares in a company. They are considered the owners and have a stake in the company's performance. Shareholders receive dividends (a share of profits) and have voting rights in company decisions.
Analyzing the Impact of Changing Business Objectives
When a business changes its objectives, it can significantly affect shareholders. Consider the following points:
1. Divergent Interests of Shareholders
Not all shareholders will agree with a change in business objectives. Some might focus on profit maximization, while others might prioritize social responsibility. This can lead to conflict and division among shareholders.
- Example: A company decides to shift from profit maximization to a more socially responsible approach by reducing its carbon footprint. Shareholders who prioritize short-term profits might oppose this change, while those who value environmental sustainability might support it.
2. Impact on Share Value
Changes in objectives can impact the value of company shares. If the change is perceived to be beneficial, share value might increase. Conversely, if the change is seen as detrimental, share value may decline.
- Example: If a company invests heavily in research and development aiming for long-term growth, this might initially impact short-term profits, leading to a temporary decrease in share value. However, if the research leads to successful products and increased market share in the future, share value might climb in the long run.
3. Conflicting Expectations
Shareholders often have different expectations based on their individual circumstances and investment strategies. A company's shift in objectives might not align with these expectations, leading to dissatisfaction.
4. Potential Action by Shareholders
If shareholders are unhappy with a change in objectives, they might take action:
- Raise Concerns at the Annual General Meeting (AGM): Shareholders can voice their objections during the AGM and try to influence the company's decisions.
- Sell Their Shares: Dissatisfied shareholders might sell their shares, impacting the company's market capitalization.
- Legal Action: In extreme cases, shareholders might take legal action if they believe the company's actions are detrimental to their interests.
Essay Structure and Tips
Introduction
- Define key terms: business objectives and shareholders.
- State the main argument: Changing business objectives can have significant effects on shareholders due to their diverse interests and expectations.
- Introduce the specific changed objective you will focus on.
Main Body
- Paragraph 1: Explain the changed objective and why the company might pursue it. (AO1)
- Paragraph 2: Analyze the impact of the changed objective on different types of shareholders (e.g., long-term investors vs. short-term traders). (AO2, AO3)
- Paragraph 3: Discuss potential conflicts and tensions that might arise between shareholders and the company due to the changed objective. (AO3)
- Paragraph 4: Explore possible actions shareholders might take in response to the changed objective. (AO3)
Conclusion
- Summarize the main points of your analysis.
- Reiterate your argument: Changing business objectives can have complex and potentially conflicting effects on shareholders.
- Offer a brief conclusion about the importance of considering shareholder interests when making strategic decisions.
Additional Tips
- Use real-world examples: Refer to specific companies that have changed their objectives and the impact on their shareholders. This adds credibility and relevance to your analysis.
- Use evidence: Support your points with relevant data, statistics, and research findings. This demonstrates a deeper understanding of the topic.
- Be clear and concise: Use simple language and avoid jargon. Ensure your arguments are logically structured and easy to follow.
- Proofread carefully: Check for spelling, grammar, and punctuation errors. A well-written essay reflects a higher level of professionalism and attention to detail.
Extracts from Mark Schemes
Analyse reasons why changing a business’ objectives might affect its shareholders.
It is acceptable for candidates to answer this question by using ONE changed objective that causes different effects on shareholders.
Indicative Content
Responses may include:
AO1 Knowledge and understanding
- Knowledge of objectives/shareholders.
- Reasons why objectives might change e.g. survival to growth, profit making to social responsibility.
AO2 Application
- Changed business objectives applied to shareholders - .
AO3 Analysis
- Changes may be agreed by some shareholders but not supported by others – leading to conflict and division.
- Different shareholders have their own personal interests – they will try to protect those interests.
- Some shareholders may see CSR as detrimental to profit making – raise issue at AGM.
- Shareholders may see a movement away from economic objectives towards social or human objectives as undermining the very purpose of the business – to make profit.