Introduction. The purpose of this chapter is to introduce the framework within which financial managers operate, and to identify the main areas where they have to make decisions.
Stakeholders There are many types of organisations and many different groups that have a stake in the Performance of the organisations.
These groups include:
- The community at large (in particular, environmental considerations)
- Employees of the company
- Managers / directors of the company
- Finance providers (lenders)
- The government
The interests of all stakeholders need to be balanced. In the UK (and the USA) the focus is on the shareholders, on the basis that it is the shareholders that have a risk and return relationship with the company. The aim is to maximize shareholders’ wealth (maximizing) while at the same time satisfying the requirements of the other stakeholders (satisfying). In many countries of mainland Europe, and Japan, the focus is more on maximizing corporate wealth which includes technical, human and market resources.
Maximizing Shareholders Wealth
Shareholders wealth is measured by the market value of their shares. It is important therefore for the financial manager to consider the likely impact on the share price of alternative strategies, and to choose those that are likely to increase the share price. We will discuss in a later chapter the factors that affect the market values of shares.
Types of Strategic Decisions to be Made By The Financial Manager
The main types of decisions that need to be made (and the main areas for consideration for the examination) are:
- Investment decisions
- Sources of finance decisions
- Decisions regarding the level of dividend to be paid
- Decisions regarding the hedging of currency or interest rate risk
Share ownership in the UK
Whereas 50 years ago the majority of shares in companies were owned by individuals, the pattern has changed dramatically. These days individual shareholdings account for less than 20% of total share ownership, with the majority of shares being owned by institutional investors. These comprise pension funds, insurance companies and unit trusts. The dominance of institutional investors is important for the financial managers in that their needs may be different from the needs of individual shareholders. The financial manager needs to be aware of the main types of shareholders in his company.