CERTIFICATE LEVEL

Subject Fundamentals of Business Economics (BA1)

Tharindu Ameresekere MBCS(UK),ACMA(UK),CGMA, Masters in Project Mgmt.(USQ)(Aus),

Lecturer PQHRM(IPM-SL),BSc(Hons) Computing(UK),BCS-PGD(UK), Cert.coach ABNLP

Module Tute 02 - Micro Economics Section 2: Shareholders & Stakeholders Management

Code BA1/TA/02
THINK ABOUT IT……

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 Micro Economics

Basics of Demand & Market System

Organisational Supply Management
Management Management and Regulations

Micro Economics Section 2: Shareholders & Stakeholders Management

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 1) Shareholder Management
Companies have the primary objective of maximising shareholder wealth. This should ultimately be
reflected in :

• higher share prices

• higher dividend payments.

The role of the managers within the business is to make decisions that will affect the value of the
company and therefore the value of shareholder wealth.

Shareholder Value can be increased by :

1. Giving Cash profits
2. Give a return better than Cost of Capital ( What banks give for deposits)
3. Managing Long & Short term deposits

Short Term Performance measurement Long Term Performance measurement

• ROCE – Return On Capital Employed In addition to measuring current financial
(Profit before interest and tax / performance, companies also need to be able
average capital employed) × 100% to measure longer-term performance, in
particular, in relation to investment. When
• Return on Net Assets we invest money as a business now we need
to know if the future returns will be worth it.
It requires us to :
• Establishing the cost of capital to
finance the investment project
• Estimating the flow of income
Higher the ROCE or RONA it is better since it shows derived from the capital
good performance. investment over the whole life of
the investment
• Valuing that flow of income

IF ALL CASHFLOWS OF FUTURE WERE TO

HAPPEN TODAY WOULD THE PROJECT BE A
SUCCESS ?

We convert all future cashflow as follows into

As its name suggests, EPS determines the profits today’s terms.
available to ordinary shareholders, expressed per share.

Dividends Per Share is another measure that shows

how much profits were given per share.

Dividends distributed / Outstanding Shares

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Share Values

This is the price paid to buy a share. The prices are highly speculative which means based on
the news that reaches the market the prices will change.

E.g. – When news about a vaccine for Covid19 reached the market the share prices of Pfizer and
BionTech the two companies that developed the vaccine went up by more than 15%.

Internal Reasons for Share Price Change External Reasons for Share Price Change
• Profit forecasts • Industry situation
• New products • Terrorism
• New director appointments • Weather
• Incidents and accidents • Competitor actions

British Petroleum Case Study

BP After the oil spill catastrophe in 2010, BP's share value fell by 47% to their lowest level in 13 years.
This fall could be explained as the market revising (downwards!) its estimates over BP's future cash
flows, in particular:

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• Incorporating potential costs in cleaning up the damage caused

• Possible US government action

• BP's ability to win new contracts in the longer term In addition the shares would have been seen as a
higher risk (effectively resulting in a higher discount rate being applied to the cash flows)

Recovery since 2010 Many UK companies have seen a rise in their share prices since 2010 due to:

• increased confidence that the worst of the recession is over

• expectations that low interest rates would continue for some time

• prospects that economic growth may continue

Stakeholder Conflicts
The needs/expectations of the different stakeholders may conflict. Some of the typical conflicts are
shown below

Stakeholders Conflicts
Employees versus managers Jobs/wages versus bonus (cost efficiency)
Customers versus shareholders Product quality/service levels versus
profits/dividends
General public versus shareholders Effect on the environment versus profit/dividends
Managers versus shareholders Revenue growth versus profit growth

*** Different stakeholders will have different requirements. When their requirements block other
stakeholders getting their requirements fulfilled, that is when the conflicts and problems will arise.

Even in Not for Profits there can be conflicts created :

For example, a council may express its mission as ‘caring for the community’.

Suppose it is considering building a new car park in the city centre where there is currently a small green
park. This would affect the community as follows:

• Local businesses would see more trade.

• More jobs would be created for local residents.

• Better parking for shoppers.

• More traffic, congestion and pollution for local residents.

• Loss of a park, thus reducing the quality of life for locals.

• The receipts from the car park could be used to reduce council tax bills and/or fund additional services
for the community.
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Principal Agent Problem in Business

This is the conflict between the principal owners( Shareholders) , and the agents in charge of
governance( Directors ) of a company.

Some situations that can lead to this are,

1. Fat cat salaries of BOD – Shareholders want less salaries for board and more profits
for them
2. Mergers and acquisitions – Directors don’t like it
3. Poor control
4. Short termism – Directors showing false profits to gain more bonus

➢ Solving the Principal agent problem

“Corporate governance” (A system of principles for the way in which a company is directed
and controlled).

As the name suggests, corporate governance is concerned with improving the way companies are
governed and run. In particular it seeks to address the principal – agent problem outlined above. The
main objectives are as follows:

a. to control the managers/directors by increasing the amount of reporting and disclosure

b. to increase level of confidence and transparency in company activities for all investors (existing
and potential) and thus promote growth in the company
c. to increase disclosure to all stakeholders
d. to ensure that the company is run in a legal and ethical manner
e. to build in control at the top that will ‘cascade’ down the organisation.

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Basic Guidelines of Corporate Governance

• The board of directors should meet on a regular basis and that active responsibilities at board level
should be spread over the board and not concentrated in a few hands; in particular, the roles of
chairperson and chief executive should be kept separate
• directors should have limited contracts (e.g. 3 years) and all director reward and payments should
be publicly disclosed
• There should be three sub-committees of the board: an audit committee, a nominations (to the
board) committee and a remunerations (of board members) committee
• greater use should be made of non-executive directors with no direct financial interest in the
company in order to provide some independence within the board especially on the board’s sub
committees
• The annual accounts should contain a statement, approved by the auditors, that the business is
financially sound and is a going concern.
• Separation of powers especially in relation to roles of the chairman and the chief executive
• Board membership to include an appropriate balance especially in relation to executive and non-
executive directors
• The adoption of the principles of transparency, openness and fairness
• To adopt an approach which reflects the interests of all stakeholders
• To ensure that the board of directors are fully accountable
• Detailed disclosure and reporting requirements
• Remuneration committees to determine the pay of directors
• Nomination committees to oversee appointments to the board
• Arrangements for organising the Annual General Meeting (AGM).

Role of Non Executive Directors

NEDs are mainly appointed to make sure the directors of the business run it in a manner that protects
the nearest of the shareholders and does not try to just improve their rewards and other benefits.

These Non Executive directors will be paid based on the time they give for the business.

End of Tute -2

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Practice Questions
1. Tim has been appointed as a Non Executive Director and he is involved in deciding what
products to introduce and how to increase the profitability of the business :
a. YES
b. NO

2. If a successful musician released a worldwide business hit and if the market gets the news his
uncle’s factory might get a big investment from him, then that business’s share price will
increase – TRUE / FALSE

3. If a bank gives a loan of 10,000 USD today and if in return a payment of 10,500 USD is to be
received in 2 years time and if the interest rate is then 15% then it is…

a. Worth it
b. Not worth it
c. Need more information

4. A business has invested 100,000 USD and the last year Net Profit was 25,000 USD which is after
paying a 4,000 USD interest rate and a 1000 USD tax. What is the ROCE of this business ?
[ ]

5. For an electronic items business venture what is the listed in the stock market what kind of a
clash will come with the government :
a. Non payment of taxes on time
b. Higher prices that customers can’t afford
c. Non payment to suppliers
d. Non payment of loans on time

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