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Google, AT&T, Citibank, and Apple are some of the most popular brands in the U.S. today.
But they're more than just brands. They're corporations with billions of dollars in revenue and investors clamoring to buy shares in company stock.
While corporations provide the goods and services that you use in everyday life, they primarily serve the interests of their shareholders.
That's what drives corporations and sets them apart from other businesses.
Did you know?
Enter The Shareholder
When we think of a business, we imagine a store or service that meets customer needs with a great product.
The business makes a profit, reinvests it back into the business, and grows its market share.
When the business gets big enough, it can buy other ventures and increase its influence over the market.
At a large enough scale, the business can "go public" and invite investors to buy shares in the company on the stock market.
These investors, or shareholders, now own a part of the business, so this changes the way the company reinvests its profits.
Shareholders Come First
You might think a corporation made the shoes you're wearing so you can walk comfortably, but they're not doing it out of the goodness of their hearts.
If the shoe is desirable and can be sold at a price greater than the cost to manufacture and sell it, it’s profitable to make and sell it.
This attracts investors to buy shares in the company, providing capital that helps the business expand, sell more shoes, and generate more profits.
In return, shareholders benefit through an appreciating share price and/or dividends to shareholders.
The Friedman Doctrine , which has dominated business philosophy for over 50 years, states:
“Corporations have no higher purpose than maximizing profits for their shareholders.”
Milton Friedman, Capitalism and Freedom
Moreover, the corporation's Board of Directors, which controls the company and can hire and fire the CEO and senior management, has what is called a fiduciary duty to shareholders to maximize their long-term returns.
How Corporations Work
A corporation is a legally recognized entity that aims to:
generate investment in an enterprise
return value to its investors
Dividends are rewards the corporation returns to its shareholders, either in cash, additional shares, or other property .
Limited liability protects shareholders if the corporation faces losses, debts, or lawsuits — it means that shareholders do not risk losing anything beyond their initial investment .
Duty of care is a legal principle that requires the corporation to act in the best interests of its shareholders .
Quiz
FNCY Holdings, a multinational corporation, wants to acquire RME Technologies, a green energy startup. It should only make the acquisition if it leads to:
While a clean energy future would be good for the world, FNCY is required to focus on financial return for its shareholders.
Take Action
Do some research on a corporation you recognize:
This Byte has been authored by
Steve Birek
Director of Learning Content at Rumie
Tariq Fancy
Social Entrepreneur