Reflection Activity #3: Accounting for Corporation
“Risk Requires Reward” vs. Calculated Risks
By Manuel Thomas S. Granada
Seeing myself as one of the Board of Directors of a profitable stock corporation with a
financially-struggling friend wanting to subscribe a number of shares in the corporation, it would
be of contemplation to whether or not assist that friend in his/her subscription process, and by
reflecting on this contemplation with the use of knowledge on the nature, laws, and operations
of a corporation, it would lead me to the signal of actually assisting him/her despite the
personal financial constraint. However, I shall crucially warn and nudge him/her that the
amount subscribed shall be within his/her capacity and impose stipulations in the subscription
contract (still subject to the corporation code), and this decision, I admit, is grounded on both
personal and logical reasons. Furthermore, a principle in finance states that risk requires
reward, thus rewards may come with the risk present for both the subscriber and the company.
However, I also personally take into principle that one must take calculated risks.
Hence, we recall that subscriptions are capital accounts to shareholders who agree to
pay consideration in the future, and it is provided by law that for a subscription to be
processed, a down payment must be made, thus increasing cash and capital in a corporation. At
this point, that friend had capability to pay. Also, we recall that subscribed share capital is part
of computing for the outstanding share capital, implying that subscribed shares are entitled to
dividends. This means that my friend would actually earn dividends, encouraging settling of
payables. However, this is merely just one side and at the same time, the optimistic view. The
negative possible scenario would be that the friend would be delinquent, putting him in much
more debt, thus making him more financially unstable. This scenario is not strategic either for
the corporation because of additional expenses or risks incurred in the process of ordering the
sale of the delinquent shares. How then can I constrain time to subject only the optimistic
scenario?
In the process of subscription, there exists this so-called “Subscription Contract”, where
lies the agreements between the subscriber and the corporation. In the pursuit of making the
risk close to reward, the company may impose its policies on shares, specifically making its
subscription contracts detailed in such a way that it may help a subscriber decide whether to
push through or not. For instance, a company may emphasize the consequences on being
delinquent, as much as possible, forcing them to not push through when they truly are not
capable. It may also lock its subscription payable due date right before a day on the distribution
of dividends. What this does is, it nudges them to really pay their payables, for it would
seemingly be a losing trade-off if they would not. What also makes this strategic for the
corporation is that they would not need to pay the dividends of subscribed shares that are not
paid for.
The scenarios above would again be courses of action I would take assuming that the
corporation is profitable. Furthermore, it would be a different case if it were unstable and would
need more capital for the continuation of operations. Going back to contemplating whether to
assist my friend or not, it would be most strategic for both parties (Friend and Corporation) to
not push through with the subscription, for first, the company is unstable, resulting in a loss on
the investment of the subscriber. Second, in the case of the friend’s delinquency, we recall the
processes such as ordering the sale, incurring expenses, and it would be very less likely for
people to bid, and this would result in the corporation in vesting the supposed receivables as
treasury shares, which is a contrast to the capital accounts, hence a reduction in capital.
Therefore, I would politely decline with reasonable and due diligence.