Entrepreneurs can easily operate their business by themselves. A highly motivated founder will continue to grow his business. As the business grows there will be a need for more fundings. This will result in more shareholders and the need to have a board of directors in order to build a recognized business structure. Separating the owners (shareholders) from the board of directors (control) will result in problems. What are they? We discussed it in this article.
Why businesses grow from small to large
There are several reasons why businesses grow from small to large. We explained some reasons here:
Owners vision
The vision of the entrepreneur on the onset or at a later stage of the enterprise might be to grow the business across nations boundaries. Some founders have the idea of running a global venture from the onset. This vision is the result of future growth prospects.
Fundings
As a company grows it will require extra funding to meet working capital needs. Also, investors might be interested in the current growth of the entity and may believe in the founders. As a result, they may approach the entrepreneurs to provide extra funding. This fund will be used for business growth.
Market share
Strategy is another reason why businesses are growing large. Some companies' strategic objective might be to become the market leader. As a result, they will want to increase their market share. By doing so, they expand and grow larger.
Meet demands
If a company is unique in their provision of products and services to their customers, it will lead to more demands. The result is expansion in order to meet the increase in the demand of the product.
Economics of scale benefits
Cost reduction is important to maintain a certain price for goods and services. One way to achieve this is by buying and selling in large quantities. When products are made available in large quantities it reduces fixed cost. This cost reduction will help increase profit.
The result of growing larger
As the company expands, there becomes a need to separate ownership from management. Therefore, owners can focus on providing equity while management directs and controls the business. As a result, corporate governance was introduced. With this, companies can have their shareholders separately from the board of directors.
The shareholders have an interest in the business, which is to maximise the return of their investments. On the other hand, directors have their interest mostly on remuneration and job security. Everyone should have a reward for their effort in the business. However, directors are given the right to control and direct the company. They have more power over the company's resources than the shareholders. This is where the problem begins.
Problems of separating shareholders (ownership) and directors (control)
There are conditions in which there might not be a problem with separating shareholders and the board. This is true when there is at least one investor with majority shareholding. In such a case, the major stockholder can have control over the board. A director or directors that failed to have the interest of the shareholders can easily be removed.
Also, small companies and large private companies may not have this issue. Because, the owners in many cases are also the executive directors. Therefore, their interests are well provided for.
Problem of separation of business ownership and control arises where no single shareholder has majority shareholding. This is especially true in the United Kingdom. Investors are not allowed to own more than five percent of the total shareholding of stock market companies. As a result, it is difficult for a single shareholder or a group of shareholders to remove a director for not having their interest.
The law of agency and also in company laws of many countries including Nigeria, the board of directors are given the right to manage the affairs of the company. They are also expected to report to shareholders on how the business is managed. However the ultimate decision making rests on the shoulders of the board members.
Directors therefore pursue their personal interest. Or any other interest they believe is best for the company. Though, this might not be in the best interest of the shareholders. Note however that shareholders are not the only individuals that have a stake in the company. There are other stakeholders such as the government, community the business is located, employees, and customers.
Therefore, directors who practiced stakeholder theory may focus more on other stakeholders than the shareholders.
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