Shareholder wealth is also defined as maximising purchasing power. It allows a company to pay its owners in dividends. The promise of regular cash flow payments in interim and final dividends is what lures investors to hand over their hard earned cash instead of spending it in the here and now. They hand over their savings to a team of managers (agents) and receive shares in return. Shareholders are generally interested in the return on investment over a long period of time and not necessarily in a short term return. Managers investing in the company’s future will produce a much higher dividend payment in the future. ‘Maximising shareholder wealth means maximising the flow of dividends to shareholders through time- there is a long term perspective’.(Arnald, G. 2007)
But the economic downturn, brought about partly by bad economic decisions, not only destroyed shareholder wealth value but also hurt the stakeholders. Shareholders are holding stocks for less time and demanding a more immediate return on investment. Boardroom meetings are dominated by talks of moving over seas to save money. Long term strategy conflicts with what is best for the shareholder.
Should some of the key principles of modern capitalism be questioned, such as the idea that businesses should only be run for immediate benefit of their shareholders and that there isno limits to executives pay and bonuses?
Mark and Spencer’s new chief executive Marc Bolland who replaced Sir Stuart Rose in May 2010 has been offered the ‘Richest pay deal on the high street, dwarfing rivals running bigger chains on the high street like Sainsbury’s and his previous employer Morrisons’. Reaching a pay package close to £15m in his first year including £7m compensation for losses he would have incurred, from leaving his previous employment in shares and bonuses. (The Guardian)
In March 2011, share prices dropped to £3.29 as the outlook for the high street was looking gloomy as cost of living chipped away at consumer spending. As government cutbacks, rising prices and interest rate rises took effect increasing the price of commodities. The food division in April was ahead by 3.4% shopper treat themselves to the £15 Mother’s Day deal attracting 500,000 shoppers. The shares finished up 20.4p at £3.60, a rise of 6%. See Figure I
Figure I.
Marks and Spencer’s has also opted out of passing on the full extent of its rising costs to cash –strapped shoppers. As promotion in rival supermarkets take their toll. The dent in profits can be seen below in Figure II as sales are down 8% on last year.
Figure II.
One thing Bolland noticed when he took over the company was how Marks and Spencer’s was not cashing in on it heritage as an innovator. Shoppers are looking for quality on the high street and have started purchasing the more expensive range as shoppers look for quality. This is a sign that he is looking at the long term strategy of the company and trying to build on the brand.
Marks and Spencer’s has also been looking at ways to reduce operating costs as they expect costs to rise 5% this year. Some of the ideas were to move some of its manufacturing operations out of China to lower cost locations such as India and Sri Lanka,Increasing share holder wealth.
At the prior years annual general meeting about 16% of shareholders failed to vote in favour of Mr Bollands remuneration report, after concerns over the amount offered to persuade him to join the company. A move which originally angered some of its shareholders, when he was originally offered the position. 75% was originally based on the companies profit performance. Now bonuses are based more on the individual’s performance against targets. Due to this Bollan was only given £1m of his original £2.4m bonus, as M&S missed targets.
In this instance Mr Bollan appears to have the best interest and the long term goal of the company as his main focus, unlike his predecessor Sir Rose who appeared to be more aggressive in his role, which main goal was predominantly to maximise share holder wealth. Bollan is looking beyond the short term goal, I think yes he knows it is about shareholders, but also thinks it’s about customers, colleagues and community.
References
Arnald, G. (2007) ‘Essentials of Corporate Financial Management’, Prentice Hall Financial Times, pp. 25
Articles
Gribben, K. (2010) ‘Will taking the long-term view hit shareholder value?’, Financial Times
Roberts, D. (2010) ‘Capitalismin crisis: Corporate governance: Revolution in the air – but it could help resue business from itself’, The Guardian Financial Pages; Pg 30
Finch, J. (2010) ‘Capitalism in crisis: Executive pay: Rogues gallery in defiance of mounting investor anger’, The Guardian Financial pages; Pg 31
BBC News, (2011) ‘M&S Boss Marc Bollan misses out on £1m bonus’, BBC News Business
No comments:
Post a Comment