Business finance : theory and practice

Business objectives
Growth
Growth of profits and/or assets does seem a more realistic goal and appears to reflect
the attitude of managers. Growth implies that short-term profit will not be pursued at
the cost of long-term stability or survival. Growth is not really a precise enough statement
of an objective. This is because growth (as we have seen) can be achieved merely
by raising new finance. It is doubtful whether any business would state its objective as
being to issue as many new shares as possible.
Satisficing
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Many see objectives that relate only to the welfare of shareholders as old-fashioned
and unrealistic at the start of the third millennium. They see the business as a coalition
of suppliers of capital, suppliers of managerial skills, suppliers of labour, suppliers of
goods and services, and customers. None of the participants in the coalition is viewed
as having pre-eminence over any of the others. This coalition is not seen as a selfcontained
entity but viewed in a wider societal context. Cyert and March (1963) were
amongst the first to discuss this approach.
The objectives, it is argued, should reflect this coalition so that the business should
seek to give all participants satisfactory return for their inputs, rather than seek to
maximise the return to any one of them. This is known as satisficing.
Maximisation of shareholders’ wealth
This is probably a more credible goal than those concerned with either return/growth
or stability/survival as single objectives, since wealth maximisation takes account of
both return and risk simultaneously. Rational investors will value Business A more
highly than Business B if the returns expected from each business are equal but those
from Business B are considered more risky (that is, it is less likely that expectations
will be fulfilled). Wealth maximisation also balances short- and long-term benefits in
a way that profit-maximising goals cannot.
A wealth-maximisation objective should cause financial managers to take decisions
that balance returns and risk in such a way as to maximise the benefits, through
dividends and enhancement of share price, to the shareholders.
Despite its credibility, wealth maximisation seems in conflict with the perhaps still
more credible objective of satisficing. Wealth maximising seems to imply that the
interests of only one member of the coalition are pursued, perhaps at the expense
of the others. To the extent that this implication is justified, the shareholder wealth
maximisation criterion provides a basis for financial decisions that must then be balanced
against those derived from objectives directed more towards the other members
of the coalition.
It could, however, be argued that satisficing and shareholder wealth maximisation
are not as much in conflict as they might at first appear to be. This is to say that wealth
maximisation might best be promoted by other members of the coalition receiving
satisfactory returns. Consider one of the members of the coalition, say the employees.
What will be the effect on share prices and dividend prospects if employees do not
receive satisfactory treatment? Unsatisfactory treatment is likely to lead to high rates
of staff turnover, lack of commitment by staff, the possibility of strikes – in short, an
unprofitable and uncertain future for the business. Clearly this is not likely to be
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