Expalin the term Company Objectives

Financial management is anxious with making decisions about the provision and use of a firm's finances. A rational method to decision-making requires a clear idea of the objectives of the decision maker or more importantly the objectives of those on behalf of whom the decisions are being made.

There is modest agreement in the literature as to what objectives of firms are or even what they ought to be. But most financial management textbooks make the assumption that the objective of a limited company is to maximise the wealth of its shareholders. This assumption is usually justified in terms of classical economic theory. In the market economy firms that achieve the highest returns for their investors will be the firms that are providing customers with what they need. Consecutively these companies for the reason that they provide high returns to investors will also find it easiest to raise new finance. Hence the thus called invisible hand theory will ensure optimal resource allocation and this should automatically maximise the overall economic welfare of the nation.

This argument knows how to be criticised on several grounds. Firstly it disregards market imperfections. For instance it might not be in the public interest to allow monopolies to maximise profits. Secondly it ignores social wants like police, health, defence etc.

From additional practical point of view directors have a legal duty to run the company on behalf of their shareholders. This though begs the question as to what do shareholders actually require from firms.

An additional justification from the individual firm's point of view is to argue that it is in competition with other firms for further capital and it so needs to provide returns at least as good as the competition. If it doesn't it will lose the support of existing shareholders and will find it difficult to raise funds in the future in addition to being vulnerable to potential take-over bids.

Against the usual and legal view that the firm is run in order to maximise the wealth of ordinary shareholders there is an alternative view that the firm is a coalition of different groups preference shareholders, equity shareholders and employees, lenders customers and suppliers. Every of these groups must be paid a minimum "return" to encourage them to participate in the firm. Any surplus wealth created by the firm should be and is the subject of bargaining between these groups.

At first view this seems an easy way out of the objectives problem. The directors of a company could articulate let's just make the profits first then we'll argue about who gets them at a later stage. In other words maximising profits make possible the largest pool of benefits to be distributed among the participants in the bargaining process. Though, it does imply that all such participants must value profits in the same way and that they are all willing to take the same risks.

In fact the real risk position as well as the attitude to risk of ordinary shareholders loan payables and employees is likely to be very different. For example a shareholder who has a diversified portfolio is likely not to be as worried by the bankruptcy of one of his companies as will an employee of that company or a supplier whose main customer is that company. The trouble of risk is one major reason why there cannot be a single simple objective which is common to all companies.