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A corporation is a legal entity. A corporation is owned by its shareholders who cannot be sued for what the corporation does. In a dispute the corporation is sued.

The corporation answers to shareholders once a year at the annual meeting. The shareholders appoint the board of directors. The board of directors hire managers that run the corporation.

Managers sometimes serve their own interests that is not always good for the shareholders. This is called the agency problem.

The board can authorize bonuses to overcome the agency problem. This helps to drive profits for managers and the shareholders.

A corporation pays taxes on earnings, and then pays dividends to shareholders from those earnings. Dividends, or earnings are taxed again in the shareholders own federal taxes. This is called double taxation.

The shareholders earn return on their investments through capital gains on the stock and through dividend payments.

The true objective of business is to make a profit in the form of retained earnings. Retained earnings are reinvested in the corporation.

So the Executive team’s goal is to increase the stock price and increase earnings.

Stakeholder theory will be discussed in the next blog.

Dollar Today

A dollar today is worth more than a dollar in the future. This is why we have something called interest. If you invest 100 dollars today and are promised 5% interest in the future or in one year; the value is 105 dollars. This might sound great but what if the inflation rate was 6% in one year. Your real interest rate would be 5%-6%=-1% interest. Some would say that you could spend the 100 dollars today, and in this circumstance this might be best. There is a formula for future value with simple interest: Future Value= Present Value(1+interest)raised to time in years. This is just a basic way to see the time value of money. Money becomes less valuable in the future unless the interest is high enough to overcome the inflation rate.

Customer

Instead of complaining on LinkedIn about our jobs, we should be focusing on the customer. How can we wow the customer? You can wow the customer in any industry. In a phone center, you can connect the customer directly to the right department. In retail you can check the back stock while the customer waits.

World Class Customer service is a business term that means going above and beyond for the customer. Anything can be deemed World Class, and its a “yes we can mentality”. Customer can you call another of your stores and have an item put on hold? Yes sir I can. Just think today about things that wowed you as a customer, and try to practice it in your business.

Marginal Propensity to Consume

Have you ever been hot on a summer day and extremely thirsty? So get your self a glass of water. The first gulp of water is the most pleasurable. Each glass of water has diminishing pleasure after a warm day.

This is called the Marginal Propensity to Consume. After a certain point, pleasure from consuming decreases at a small rate or Diminishing Returns . Playing video games is another example. They are fun until you beat the game, then playing each time decreases utility. Utility is the economic term for pleasure, and utility decreases as we do things more.

Training

According to recruiters, retail management and restaurants do not count as experience for corporate jobs even with advanced degrees. So executives I challenge you not to go to stores or restaurants then. So remember next time you reject an applicant with retail or restaurants on there resume, ask yourself, what did you do before you got your senior level job; probably, restaurants or retail.

Two Books

So to begin any business blog, we must talk about Enron. Enron executives were clever. Essentially they kept two books a real book and a fake book. Every quarter they published the fake book, until someone at headquarters got mixed up and posted the real book.

Enron went from AAA rating to junk rating or CCC or lower overnight. To make matters worse, they invested all or their employee pensions in Enron stock. This action destroyed thousands of lives. In fact CEO Ken Lay had a heart attack before he had to report to federal prison.

Today all companies are required under the Sarbanes-Oxley Act to have an independent accounting firm to audit their books. The act protects investors, the Government, and employees. Enron sure “cooked the books” in the early 2000s.

Layoffs

Every one layoff, if workers make 40,000 to 75,000 of disposable income, is now taken out of the economy. This always causes a cascading effect, because one layoff leads to another layoff; which could lead to a recession.

Disposable income equals the income available to spend after taxes. So layoff or firings lead to a negative returns to scale in the Macro Economic economy. So in my image if the geese represents 2 workers that now have less money to spend on their family with a layoff. See image below of the results of layoffs. Less money for the goslings chicklets.

Recall

If you are having a massive number of recalls; you are not following Total Quality Management. Total Quality Management (TQM) allows workers to stop the assembly line when a defect is found, so a correction can be made.TQM wants no more than 1 defect per 1,000,000 units.

Recalls cost billions of dollars. Have you ever heard grandpa say, “It takes just as much time to do it right the first time.” Companies need to follow this policy.

Effects of recalls: Consumer deaths, National Highway Safety Board litigation, loss of brand trust, customer time, etc.

I have to include a picture of a ford vehicle. Ford seems to lead the auto industry in Recalls.

Market capitalization or Total Enterprise value is the price per share * share outstanding. This is the worth of a corporation. For example corporation x has 2 shares outstanding and the price per share is 2; so 2*2=4. The corporation is worth 4 dollars.

Market Cap represents the total value of a corporation. The formula for market cap is shares outstanding x the price per share. Currently Ford Motor company’s market cap is 42 Billion. Apple’s market Cap is 3 Trillion dollars.

Support

To promote warranty Apple should end planned obsolescence. An iPhone 4 should still be supported by the company. If the national highway safety board says their is a recall on a 15 year old mustang Ford must comply, and fix it. Lets end waste and destruction of the planet by holding Cell Phone companies accountable for not supporting their products.