Essay on Conflict of Interest in Corporate Governance

Introduction

Portland Design & SEO has been a company that has provided competent web design, web hosting, and Search Engine Optimization (SEO) services to the customers both locally and internationally. The company has in the recent past been the most recognized provider of this service given the quality and the good customer relationship that it has built over the years. The vision of the company is to take online every other company or business that believes in the value of the internet. The company was founded by a group of investors who now have shares in the company. Since its inception, the company has maintained a dedicated team of the top management who were basically colleagues of the shareholders. The success that the company has achieved in the market lies squarely on the hard work and competent decision making that the management has been making. It is no doubt that was it not for the team, the Portland Design & SEO market share would have bulged to the current standing. The effort that the managers have put in the company is what has transformed it into what it has become (William, 2016). However, as the company grows through the ranks and attracts more people, there have been pertinent issues that have rose in regards to the interests of the different stakeholders.

Explanation of the Issue

The company has been hit by conflict of interest between the top managers and the shareholders of the company. The top management through the board of directors has recently been making decisions that do not largely represent the interests of the shareholders. To begin with, the management team have been proactive in investing in short-term projects that promise profitability while being adamant about creating competitive strategic options that the company will take on in the long-term. This is basically tied to the ideas that their income is tied to the profitability of the company in the short-term. The management team has been exploiting the shareholders by setting their remuneration schemes higher than the industry norms. This has been disguised on the idea of having minimized taxes rather than maximizing the shareholders’ wealth- which would be an appealing view to the shareholders. However, in their case, the managers of Portland Design & SEO have taken advantage of this fact. They hold on to the idea that having the compensation expenses higher would relieve the company of the tax deductible. They have also been more inclined to invest in risky short-term projects something that is not in line with the risk-averse nature of the shareholders. The managers are receiving a large portion of compensation in the stock options and salaries. In light of the high levels of risk that they are assuming in operating, financial and investing activities, the revenue share of the shareholders is at stake. The company is in a situation in which it is not making sufficient profit and at the same time overpaying the employees. This is all at the expense of the shareholder returns. Also, the situation has led the company to shelf all of the long-term goals given that it has lacked the capacity to contain the current financial constraints.

For the above situation, the shareholders are contemplating laying off the top management in a bit to bring in a new energy in the workforce that would probably change the situation. They are concerned about the investment trend that the company has taken. However, they are unsure whether they can find a team that understands the ins and outs of web design, hosting and searches engine optimization. This is because the current team of managers is the one that has been leading the company since its inception.

Analysis of the Information

Looking at the highlighted situation that Portland Design & SEO is facing, there are different things that need to be evaluated for the company to continue on the right track. The shareholders are losing their catch in the company. Not only have their current returns been deflated but also the future prospects have significantly been reduced. The decision by the managers to have the company investment portfolio comprised of over 70 percent of the short-term investments is crippling the company’s competitive edge. With such a trend, the company might not be in a position to remain competitive in the market. The shareholders are concerned by the fact that it has been in recording minimal profits in the recent past. They are also unable to forge into the future given the constricting financial problems that the company has been plunged into. The disguised reduction in the tax deductible by increasing the salaries and stock options of the employees is something that is critically affecting the financial health of the company. The interest of the managers is apparently being prioritized in the decision making patterns. In essence, the company has sacrificed profitability in when trying to cut on the tax due. The top management has stood out to be the beneficiary of this scheme.

Consideration of alternative viewpoints and conclusions

The decisions that the business leaders make in the day-to-day activities of the business have a wide-spread impact on the different stakeholder of the business. In the case of Portland Design & SEO, the top management has been on the forefront in driving the company from its inception. In other words, the legacy of the company has been built around the efforts of the top management. At this point, however, the owners’ interests have significantly been side-lined. If the owners agree to lay off the existing managers, the company runs the risk of losing a legacy that has been built for years. Also, it that is not done, the consequences are still unbearable for the company. Perhaps the shareholders should switch the focus from cutting on the tax due to maximizing their wealth. This can be done by implementation of the policies that guide the company through the achievement of organizational goals. The shareholders can also consider having the managers own part of the company through the employee stock-based compensation. As such, they would have been enjoined in the shareholding capacity and thus they are likely to make more prudent decisions. The shareholders also have the option of laying off the current management team and hire new ones. Even though this seems like the extreme end of the situation, it could be relevant for the progress of the company.

It is important that the owners of Portland Design & SEO approach every with the definite plan in mind. They first of all need to state the problem clearly. The route of the problem that the company is facing must be established. They will then need to review the facts that govern the operation of a company. In this, they will be able to iron out some of the unnecessary details that are surrounding the company (Scarlet, 2015). Issues of customer loss can be addressed at this point. The third step that the owners would move to will be to identify the relevant factors both internal and external which have led to the situation. In doing this, they will need to be objective enough so as to come up with the most suitable way of resolving the stand-off between them and the management team. Developing a list of options from which they will choose from the will be the next step. They should put all the ideas together and arrange them from the least possible to the most productive. In doing so, they can be able to identify the solutions that will create a win-win situation for both the managers and themselves. After this, testing each of the available options will help them understand how it would better the organization. Finally, they can be able to come up with the most optimal solution that will see the company regain its original position.

Conclusions and Recommendations

As at the moment, Portland Design & SEO cannot continue in the state of operation. The shareholders have to find a position and rise to defend it. There are different avenues as highlighted that they can use to salvage the situation. Having to lay-off the entire management would be a costly undertaking let alone the negative public image that it could tag along. To hire a completely new team would run the company into additional training costs which cannot guarantee the financial stability of the company (Pherson, 2013). The amicable solution that the shareholders can enhance at the company is to engage policies that protect the future of the company. The company should be made to invest 50 percent of the assets in the long-term projects and the remaining half in the short-term activities. The managers and other senior employees of the company should be enjoined as shareholders so that they can make decisions that cater to the universal needs of every stakeholder. In this way, the company will be able to forge forward and start making profits not just in the short term but also in the future.

References

A person, R. (2013). The Five Habits of the Master Thinker. Retrieved from http://henley-putnam.national.edu/journal-of-strategic-security-article/five-habits-master-thinker/

Scarlet, S. (2015). Ethical Decision-Making. Retrieved from https://serc.carleton.edu/geoethics/Decision-Making

William, G. (2016). Conflicts Between Corporate Management and Shareholders. Retrieved from https://smallbusiness.chron.com/conflicts-between-corporate-management-shareholders-75063.html