What is primary financial purpose, Financial Accounting

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Q. What is primary financial purpose?

The primary financial purpose of a company is typically stated to be the maximisation of shareholder wealth and Sassone plc has declared publicly that this is one of its objectives. Returns to shareholders be able to be measured in terms of dividend yield and capital growth reflecting the attention paid by investors to dividends and increasing share prices. Both dividend yield as well as capital growth can be measured over a standardised holding period in order to assess shareholder returns.

A few of the institutional shareholders of Sassone have complained that annual dividend payments have not increased at an acceptable rate because of expenditure on environmentally friendly and socially acceptable projects. This represents a disagreement between a financial objective (shareholder wealth maximisation) and a non-financial objective (social welfare). The claim is that needless expenditure has reduced the amount of profits paid out as dividends. It is significant for Sassone plc to find the extent to which this view is shared by other institutional shareholders given the relative size of this shareholder grouping.

This conflict among objectives cannot be resolved by rational argument. It is probable that Sassone plc's support for environmentally-friendly and socially acceptable projects has generated a positive image in the minds of its customers resulting in increased sales but this effect can't be quantified readily. On the other hand it is possible that sales would be lower if Sassone plc didn't support environmentally-friendly and socially acceptable projects since such behaviour may be expected by its customers. The institutional investor's complaint may possibly possibly therefore be short-sighted although a comparison between Sassone plc and its competitors may display that its expenditure on socially acceptable and environmentally-friendly projects is larger than necessary. But the benefit of such projects may arise only in the long term whereas the complaint by institutional investors indicates a short-term focus.


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