This article looks at how private business organizations decide on their business objectives. The most common business objectives for businesses in the private sector are concerned with:
1. Survival.
2. Growth.
6. Maximizing short-term sales revenue.
7. Maximizing shareholder value.
8. Corporate Social Responsibility (CSR).
Maximizing Shareholder Value
This shareholder-value objective puts the interests of shareholders (investors) above interests of other stakeholders such as managers or employees. It usually applies to public limited companies.
Public limited companies maximize shareholder value in two ways – by increasing the company share price and dividends paid to shareholders.
Direct management actions towards taking decisions will either increase the company share price and dividends paid to shareholders or decrease them. These targets might be achieved by pursuing the goal of profit maximization. When the firm is able to sustain and grow profits over time, the shareholder’s value (the total amount in the stockholders’ equity section of the balance sheet) will increase.
EXAMPLE: Cadbury Schweppes has the business aim of ‘increasing the value of the business for our shareholders’. To achieve this aim it has adopted a ‘managing for value’ philosophy based upon these objectives:
– To increase earnings per share by at least 10% per year;
– To generate free cash flow of at least £GBP150,000,000 pounds per year;
– To double the value of shareholders’ investments in four years.
One limitation of this strategy is that there might be potential conflict between this objective that prioritizes investors and the aims of other stakeholder groups.
Examples of the maximizing shareholder value objective
1. Increase earnings per share to 4.5% in Q3 of 2021.
2. Increase the dividend to the level of USD$0.51 per share.
