MAC3702 - Complete Revision Course Notes

MAC3702 - Complete Revision Course Notes Made in

1. Shareholders wealth maximisation In the 1990’s business entities often cited their main goal as maximising of shareholders wealth, and it became common for company boards to focus on shareholder value, thereby maximising returns to shareholders. This goal encourages short-term thinking and a bias towards certain stakeholder groupings at the expense of others. Business entities today face a global environment. It has therefore become appropriate and necessary that entities today pursue goals that result in the long-term sustainability of the entity, instead of focusing on short-term business gains/profits that are gained at the expense of harm being done to people and planet. 2. Stakeholder theory/framework/approach The stakeholder theory has laid the foundation for explaining the relationships between business and its stakeholders other than shareholders, and for explaining that an entity may choose to satisfy objectives other than economic objectives. Other emerging perspectives on the purpose and goal of a business entity in modern society include the stewardship model and conscious capitalism. According to the stewardship model, the purpose and role of business is to serve by contributing to the advancement of humankind. Profit is not identified as a purpose but as an outcome and there is a strong emphasis on corporate responsibility and business ethics centered on doing business virtuously by acting as stewards. Conscious capitalism embodies the idea that profit and prosperity go hand in hand with social justice and environmental stewardship, and entities that practice conscious capitalism have a higher purpose than maximization of shareholder returns. Society is seen as the ultimate stakeholders, and profit is viewed as a natural outcome flowing from doing the right things. Business model or value creation model of an entity Entities can describe the manner in which value is created for shareholders and major stakeholders by their business model, or value creation model. Value can only be created for stakeholders if the entity has a clear strategy that takes the external and internal business environment as well as the role and needs of each of the stakeholder groups of the entity into consideration. 5 MAC3702 Revision Course study material. The ability to create value is dependent on the following factors:  External environment  Relationship with stakeholders  Availability, affordability, quality and management of resources (capital) Resources (capital) can be categorised as:  Financial capital – the pool of funds  Manufactured capital – tangible assets  Human capital – people’s skills, experience etc.  Intellectual capital – intangible assets  Natural capital – water, land, minerals etc.  Social capital – institutions, relationships established within and between each community etc. Stakeholders of an entity Stakeholders are entities or individuals that can affect or are affected by the activities and actions of the entity. Key stakeholder groups  Shareholders or owners of the entity Legal  Lenders and suppliers of borrowings contractual  Employees, including directors and managers obligation  Government  The natural environment Legislation or industry standards