Company aims in Chelmsford are generally determined by the Chief Financial Officer (financial manager) of a company with the objective being to maximise shareholder value. This is often an easy task because, for relatively small firms, the objective of the owner/manager and the shareholder may typically be one and the same. However, as organizations grow in size this relationship between the manager and shareholders of a comoany is truly less direct.
What the Shareholder Wants
Anyone who has ever bought a stock or a bond desires one thing: to make money on the investment. In the case of owning a stock, this may occur in the form of increasing share price or through dividend yields. In the case of a bond, this would be included in bond price and coupon payments (regular payments that are promised to the bondholder for owning the bond).
In both cases, shareholders own part of the firm because they believe that the value of their investment will increase. In a tangible way, increases in shareholder value are directly tied to the value of the firm in which the investment is made.
If a firm’s value increases, its shareholders will benefit. If the value does not increase, or even decreases, the shareholders will not make money on their investment. In the latter case, the shareholders may decide that it is better to sell their stake in the organization and use their money for another, more profitable, investment. In this case, the message is clear to the firm: the former investor believes that there are better investments than those that the firm can provide.
If enough investors sold their stakes, the supply of the stock would exceed demand, and it is likely that the price of the firm’s stock would decrease. A similar situation could exist in the bond market. More supply than demand (of a firm’s bonds) will result in a decrease in their value.
In both cases, the firm’s overall value would decrease. But how? Take the amount of stock that a firm has outstanding with investors and multiply it by the new stock’s price. Compared to the previous price, the new value of the firm will be less. What implications does this have for the firm? In some cases, a decrease in the market value of the firm may mean that it has less ability to secure a bank loan or other form of financing. This also may be a message to potential investors that the firm is not fiscally strong.
As you can see, the importance of focusing on shareholder value can’t be overstated. If the firm’s managers do not focus on maximizing shareholder value, a string of events could occur that would negatively affect the firm and its ability to achieve its objectives.
Do Managers Always Maximize Shareholder Value?
If this were a perfect economy and every firm conducted itself with this key objective in mind, then the answer to the question would be a resounding “Yes!” In reality, however, this does not occur all of the time.
As the text points out, you may hear managers speak of other goals that are not commensurate with the immediacy of maximizing shareholder value. As an aside, you may want to examine your own organization to determine what its goals and objectives are. You’ll probably find that most organizations tend to focus on this theme (if not explicitly, then implicitly) through the use of other goals or objectives that tie into the overarching goal.
For example, a company may indicate that it is focused on serving customers and meeting their needs. If the firm can tie this goal directly to maximizing shareholder return, then this would be an appropriate goal for the firm. If the firms’ managers cannot demonstrate how this ties directly, then the firm could be setting itself up for failure. In the long-run, if this goal did not contribute to maximizing shareholder value, shareholders may walk away from the firm and the firms’ market value may suffer.
Another example that is rampant in industry — and your organization may have this as a stated goal — is a focus on profit maximization. At first glance, this appears to be in line with maximizing shareholder value. However, one has to be careful in interpreting this objective, as well. What is meant by this? If a firm maximizes its profit today, but sacrifices the long-term financial well-being of the company, it is highly possible that shareholders will not reap the size of benefit that they could have otherwise realized.
Two other examples of why this may not be the best objective include:
- The company could increase next year’s profit by decreasing (maybe even eliminating) the current year’s dividend.
- Different accountants calculate profit differently. This could leave the door open for problems in using different definitions and, again, sacrifice shareholder value.
Managers who focus on maximizing shareholder value, and can successfully tie tactical objectives with this strategic vision are likely to be successful. Those who do not risk failure.
Contact Andrew Douglas Wills and Legal Services today via www.andrewdouglaswills.co.uk to see how we could help you to establish your company aims in Chelmsford and throughout Essex.
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