Corporate Objectives and Stakeholder Value
Shareholder value and stakeholders
This domain examines whose interests the company serves and how conflicts are controlled. The exam tests shareholder wealth maximisation, agency theory, stakeholder mapping, corporate governance, ESG and the measurement of stakeholder value. You should be able to explain why a decision that raises profit can reduce shareholder value.
Core rules
- Shareholder wealth is measured by market value plus dividends, not by accounting profit; timing and risk matter.
- Agency costs arise when managers' interests diverge from owners': monitoring, bonding and residual loss.
- Governance mechanisms include independent boards, audit committees, remuneration linked to long-term value, and transparent disclosure.
- Mendelow's matrix maps stakeholders by power and interest: keep satisfied, manage closely, inform, monitor.
- Stakeholder value does not mean equal weight to all claims; it means identifying material claims and managing trade-offs.
Worked example
A manager can choose Project A with NPV LKR 10m to shareholders or Project B with NPV -LKR 2m but a private benefit worth LKR 5m to the manager. If the bonus depends on short-term reported earnings and B adds LKR 1m to this year's profit, the manager may choose B. The agency cost is the value forgone: LKR 12m, calculated as 10m minus negative 2m. A long-term share-based plan that pays only if NPV is positive reduces this conflict, though it introduces new monitoring costs.
Traps
Do not equate profit maximisation with shareholder wealth; do not treat CSR as public relations; do not assume all stakeholders have equal power; and do not ignore the cost of governance mechanisms themselves.