Question

Attempt the following:

Explain the demerits of Joint Stock Company.

Answer 1

The demerits of Joint Stock Company are as follows:

1. Rigid Formation: The formation of a joint stock company is lengthy, difficult, and time-consuming. There are many legal formalities for starting a business. Promoters have to prepare documents like Articles of Association, Memorandum of Association, etc. A private company has to go through two stages of information. A public company has to go through four stages of information.
2. Delay in Decision Making Process: In a company form of organization no single individual can make a policy decision. All important decisions are taken by the Board of Directors. The decision making process is time-consuming. Businesses may lose opportunities because of delays in decision making.
3. Lack of Secrecy: The management of companies remain in the hands of many persons. Everything is discussed in the meetings of the Board of Directors. All important documents are available at the registered office for inspection. Thus, there is no secrecy in business matters.
4. Excessive Government Control: A large number of rules are framed for the working of companies. The companies will have to follow rules for internal working. The government tries to regulate the working of the companies because large public money is involved. In case regulations are not complied with, large penalties are involved.
5. High Cost of Management: The management of joint stock company form of organization is costly. Services of experts like share brokers, underwriters, solicitors, bankers are needed which is costly. Highly qualified staff is needed. They are paid good salaries. The dissolution of the firm is also costly.
6. Reckless Speculation: Directors look after the management of the company. They have full information about the progress of the company. They use these details for speculation in shares. This results in fluctuations in share prices. This affects public confidence.
7. No Personal Contact: There are a large number of employees in the organization. There is no personal contact of owners and managers with employees. Lack of appreciation demotivates employees. Similarly, managers and directors are not able to maintain personal contact with their customers. Thus, customers' likes and dislikes are ignored.
8. No Direct Effort Reward Relationship: Joint Stock Company is owned by shareholders and managed by the Board of Directors. Board of Directors are paid for managing and profit is shared by shareholders. There is no direct relationship between efforts and rewards. Directors may not take a lot of interest in the working of the company.