Decisions by Managers of Public Companies (AQA Paper 2 2018, Q2.1)

Here's a suggested answer for the 9-mark question on how management decisions might be different if managers were operating in a public rather than private limited company.

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Possible response

As a public limited company ("PLC"), Lego managers may feel their decisions will scrutinised more closely by shareholders and the financial media, leading to greater pressure to deliver short-term financial performance (short-termism). As a PLC Lego may no longer be controlled by the Kristiansen family, but instead by external shareholders such as pension funds as well as potentially thousands of individual shareholders. Most of these shareholders would want to see management decisions that lead to a higher Lego share price (and therefore Lego’s market capitalisation), for example by increasing profit for the year or boosting revenue growth. Accordingly, management might become more “short-termist” in their decision-making, preferring decisions that maximise short-term returns (such as profit) rather than longer-term rewards (e.g. investing in new Lego product ranges) which might have been made as a privately-owned company.

In addition, managers running Lego as a PLC would have to take account of the “divorce between ownership and control” which arises when a company is no longer managed day-to-day by the owners. For example, the Board of Lego as a PLC would need to make sure their decisions were made in accordance with the corporate governance rules that apply to public companies. These would include decisions about how much senior management are paid, what bonuses or incentives are offered and how the performance of the company is reported through its financial statements. As a private company, Lego would have fewer restrictions on these kind of decisions and how they are approved before being made.