How do shareholders of any company lay a time bomb under long-term profits?

It is argued that companies are owned by shareholders and should act in their best interests, and this is not just a moral issue. Unlike employees who receive fixed salaries or suppliers with guaranteed payments, shareholders are not provided with such guaranteed payments. 

Their income depends on the success of the company, which gives them more compelling reasons to care about its performance. If the company fails, shareholders lose their entire investment, while other stakeholders get at least something. In this way, shareholders take on risk that others do not. This motivates them to strive to maximize the company's success, and managing the business in the interest of shareholders results in maximizing profits after fixed payouts, which in turn increases the company's social contribution.

Shareholders may be considered the owners of the corporation, but being the most mobile of all stakeholders, they are often the least concerned about the long-term prospects of the company. The exception to this is those shareholders who hold significant stakes and cannot sell their shares without significantly harming the business. Small shareholders in particular, but not exclusively, often favor strategies to maximize short-term profits, often at the expense of long-term investment. 

They seek to increase dividends from current earnings, which further undermines the long-term prospects of the company by reducing the amount of retained earnings that could be used for reinvestment. Thus, when management is structured in the interests of shareholders, it often reduces the company's ability to grow over the long term.

Problems and negative long-term consequences associated with limited liability

Limited liability of shareholders in a joint stock company is, on the one hand, a protective mechanism that allows the owners of shares not to be personally liable for the debts and obligations of the company. However, this feature also creates a number of problems for the profitability of the company and its investment attractiveness. Shareholders, knowing that their risks are limited only by the value of the invested funds, may be inclined to more risky investments and strategies. This can lead to a short-term focus on profit maximization at the expense of long-term interests such as sustainability and capital investment in innovation, undermining the company's future competitiveness.

Limited liability often weakens incentives to actively monitor management actions. Since shareholders are not fully responsible for the consequences of company decisions, they may care less about the quality of corporate governance. This, in turn, leads to problems in company governance when managers, with operational power, make decisions that favor their personal interests rather than maximizing the long-term value of the company. This gap between the interests of shareholders and managers is known as the agency problem and can negatively affect the profitability of the company.

In terms of investment attractiveness, limited shareholder ownership can make a company less attractive to long-term investors. If a company is actively pursuing short-term strategies, increasing risk and reducing investment in the future, this may discourage investors looking for stable and long-term returns. More conservative investors prefer companies with a focus on sustainability and transparent management, while companies with limited shareholder ownership and short planning horizons may seem less reliable for long-term investments.

How Karl Marx foresaw the emergence and consequences of joint stock companies

Marx's prediction that the new capitalism based on joint stock companies would lead to socialism did not come true. However, his prediction that the new institution of collective ownership with limited liability would take the productive forces of capitalism to a new level turned out to be strikingly accurate. In the late nineteenth and early twentieth centuries, the introduction of limited liability greatly accelerated the process of capital accumulation and technological progress. 

Capitalism made the leap from a system of small enterprises like pin shops, butcher shops, and bakeries with a dozen employees run by a single owner to a system of huge corporations. These corporations already employed hundreds and sometimes thousands of employees, including top managers, and had a complex organizational structure.

The problem of management motivation in limited liability companies, due to the fact that managers manage other people's money and are prone to excessive risk-taking, was not a serious concern for a long time. In the early days of such companies, many large companies were headed by charismatic entrepreneurs such as Henry Ford, Thomas Edison, and Andrew Carnegie, who owned significant stakes in their companies. 

While such director-owners could abuse their position and take unwarranted risks, they had certain limitations. Since their equity capital was substantial, excessive risk-taking decisions could cause them personal harm, which kept them from acting recklessly. 

Moreover, many of these entrepreneurs had outstanding talent and foresight, and even their less-than-sound decisions were often more successful than those made by directors who were not co-owners of the companies.

Conclusion

Shareholders, especially small shareholders, can indeed be a source of problems for a company's long-term success. Their desire to maximize short-term profits often leads to less investment in future growth, laying the groundwork for the deterioration of the competitiveness and sustainability of the business. Shareholder influence, especially when focused on immediate gains, creates an imbalance between short-term and long-term interests, weakening a company's ability to grow and innovate. This can make a company less attractive to more forward-thinking investors and undermine its market position in the long run.

Managing for shareholder interests may at first glance promote short-term profitability, but in the long run it is an approach that lays a time bomb under a company's future. To avoid negative consequences, corporations must balance shareholder satisfaction with the need for sustainable development, ensuring long-term stability for all stakeholders.