The Concept of Shareholders' Value

It is companies’ aim to bring a rise in organizational capabilities, where they seeks the management of significant decisions as for giving whole potential investors and shareholders confidence to position as well as preserve interest in it. One single representative that is accounted here is the maximisation of shareholder value through wealth generation, which will be very advantageous for the company in the long term period. An agency theory according to Jensen and Meckling (1976), determines that there should be contingent within the principle’s concentration with the agent (manager) whom the principle trusts to; this therefore may provide the meeting point to the corporate objectives and unfold smooth business undertaking to promote the compliance of shareholder value enhancement, for instance the increasing of company’s share price.

Nonetheless, selfhood of the manager or principle itself might create agency problem. Strategic approaches can be disregarded due to it since own goals are the only attentiveness that will concern this person (e.g. investment done is not company’s best interest) - as the result value may be cut by investors to a lower amount. Not like a sole trader, WorldCom comprehend stakeholders and shareholders in their business which they should have been treated into sovereign individuals. Firstly, this is the case where mistreatment of the concept of value can be contemplated.

WorldCom is identified as a telecommunications company that provides a wide range of products around the world such as data, Internet, telephone communication, teleconference services through video, through the sale of prepaid telephone cards for international calls. Companies with stock code Wcom on the Nasdaq stock exchange has 73,000 employees spread across the world and a total of 8,300 employees of whom are living in Europe, the Middle East, and Africa (WorldCom, 2007). Seeing justified fact, I believe that shareholders in this company have been valued as they successfully developed the organisation till they were able to serve global market with its wide-ranging resources. On the other words, satisfactions were brought and funds could be accessed to make attractive progresses.  

However, as there were agency problem, unwanted issues occurred. WorldCom scandals sticking out after the company claimed to boost its profits up to US$ 3.9 billion in the period January 2001 and March 2002. In 2001 and early 2002, it is reported that WorldCom included US$ 3.9 billion which is the normal operating costs of investment into the post. Financial executives at WorldCom exercised various methods of hiding expenses for a period of more than two years between 2000 and 2002. They delayed reporting some expenses and misrepresented others to give investors the appearance of growth during its secretly hard times. As in the outcome, this allows the company to reduce costs during many years. With the loss of the operational costs of this post, then posted profits became larger because of the cost of which should reduce the gain. Hence, with the advantages that looks great, it will show that WorldCom's performance was very good. In the end, WorldCom shares are listed on the stock exchange in 1999 at a price of US$ 62.

In addition, to begin modestly in mid-year 1999 and continue at an accelerated pace through May 2002, the company (under the direction of Ebbers, Scott Sullivan (CFO), David Myers (Comptroller) and Buford "Buddy" Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom’s stocks.

Indeed, the top level of management here aimed to show good prospect and create values within company and existing shareholders and even potential investors; however I can barely say that WorldCom could make a stand in the long run though its market value increased significantly. It is the financial executive’s self-interests which will endanger the course of the business and did not confront with goal congruence of the entire organisation. And this is true, WorldCom’s action finally discovered and no more value could be treated in this company as shareholders wealth were down beyond expectation as they received negative response from the market. Their share price immediately plunged 94% since January 2002 due to that scandal emerge that is really inappropriate with the agency theory.

I am certain that in order to achieve organizational excellence, both creation of values as well as strategic performances including risk avoidance need to be balanced. Moreover, Jensen (2010) suggests that values then need to be built by keeping relationships within whole stakeholders such as customers, employees, regulators and even environment. The reasoning behind this is that hesitation might be appeared if company follow WorldCom decision to ‘greatly’ add wealth or value creation in the business. Thus, strategic financial management such as monitoring and selecting best purchases are some examples to possibly construct shareholder value maximisation.