State any 5 stakeholders of the firm and identify their financial objectives

CPA-Financial-Management-Section-3 Revision kit

The range of stakeholders may include: shareholders, directors/managers, lenders, employees, suppliers and customers. These groups are likely to share in the wealth and risk generated by a company in different ways and thus conflicts of interest are likely to exist. Conflicts also exist not just between groups but within stakeholder groups. This might be because sub groups exist e.g. preference shareholders and equity shareholders. Alternatively it might be that individuals have different preferences (e.g to risk and return, short term and long term returns) within a group. Good corporate governance is partly about the resolution of such conflicts. Stakeholder financial and other objectives may be identified as follows:

Shareholders are normally assumed to be interested in wealth maximization. This, however, involves consideration of potential return and risk. Where a company is listed this can be viewed in terms of the share price returns and other market-based ratios using share price (e.g price earnings ratio, dividend yield, earnings yield).

Where a company is not listed, financial objectives need to be set in terms of accounting and other related financial measures. These may include: return of capital employed, earnings per share, gearing, growth, profit margin, asset utilization, market share. Many other measures also exist which may collectively capture the objectives of return and risk.

Shareholders may have other objectives for the company and these can be identified in terms of the interests of other stakeholder groups. Thus, shareholders, as a group, might be interested in profit maximization; they may also be interested in the welfare of their employees, or the environmental impact of the company‚Äüs operations.

Directors and managers
While directors and managers are in essence attempting to promote and balance the interests of shareholders and other stakeholders it has been argued that they also promote their own interests as a separate stakeholder group.

This arises from the divorce between ownership and control where the behaviour of managers cannot be fully observed giving them the capacity to take decisions which are consistent with their own reward structures and risk preferences. Directors may thus be interested in their own remuneration package. In a non-financial sense, they may be interested in building empires, exercising greater control, or positioning themselves for

their next promotion. Non-financial objectives are sometimes difficulty to separate from their financial impact.

Lenders are concerned to receive payment of interest and ultimate repayment of capital. They do not share in the upside of very successful organizational strategies as the shareholders do. They are thus likely to be more risk averse than shareholders, with an emphasis on financial objectives that promote liquidity and solvency with low risk (e.g gearing, interest cover, security, cash flow).

The primary interest of employees is their salary/wage and security of employment. To an extent there is a direct conflict between employees and shareholders as wages are a cost to the company and a revenue to employees.

Performance related pay based upon financial or other quantitative objectives may, however, go some way toward drawing the divergent interest together.

Suppliers and customers
Suppliers and customers are external stakeholders with their own set of objectives (profit for the supplier and, possibly, customer satisfaction with the good or service from the customer) that, within a portfolio of businesses, are only partly dependent upon the company in question. Nevertheless it is important to consider and measure the relationship in term of financial objectives relating to quality, lead times, volume of business and a range of other variables in considering any organizational strategy.

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